Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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... 34 Figure 15: Monthly Rack Prices: Selected Markets .............................................................. 24 Figure 5: Canadian Retail Outlet Population .....Price History......................................................................................................................................................Price History .....................Selected Centres ...Price History ................................................ 62 Figure 33: Ottawa ...................................................................................................................................................................Price History ........... 46 Figure 23: Average Annual Throughput per Outlet............................................................Price History .................Price History ................. Gross Product Margin .................................................................................. 30 Figure 10: CPI Index Comparison .............................................................................................................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56................ 43 Figure 20: Ex-Tax Pump Price Elements .................... 33 Figure 13: Monthly Gross Marketing Margins.... 57 Figure 31: Winnipeg ......................................................................................................................................................................................... ex-tax elements ...... 56 Figure 30: Regina .................................... 70 Figure 37: Charlottetown ............................................ 71 MJ ERVIN & ASSOCIATES i .............................................. 45 Figure 22: Petroleum Gross Product Margins ............................................................................ 53 Figure 28: Vancouver ........................................... 35 Figure 16: Monthly Demand vs................................................................................................................................................. 40 Figure 18: 1995 Average "Blended" Pump Price ..............................................Regional & Urban Groupings.....Regular Unleaded ..................................... 42 Figure 19: Pump Price ......................................... 66 Figure 35: Saint John NB ................................................... 47 Figure 24: Outlet Volume vs.... 48 Figure 25: Outlet / Volume Relationship .......... 25 Figure 7: Outlet Representation by Mode.......................................... 63 Figure 34: Montreal .....................8¢ Pump Price) ...........................1988-1995 ..............................................................Selected Goods & Services .......................................Price History............... 4 Figure 2: 1996 Average Prices/Margins ............... Income................................Price History................................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) .................................................. 54 Figure 29: Calgary ........................................... 49 Figure 26: Outlet Revenues................... 58 Figure 32: Toronto ............... Costs. 28 Figure 8: Outlet Representation by Service ........................................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .................................................... 69 Figure 36: Halifax ........................................ 44 Figure 21: Gross Marketing Margin Elements ......Price History .................................................... 50 Figure 27: Victoria ............................................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)....................... 24 Figure 6: 1995 Retail Outlets by Province ...Price History................................................. 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.............................Price History............................................. 29 Figure 9: Annual Gasoline Price (Cents per Litre) .......tax.................. 36 Figure 17: Study Market Methodology ............................................. Pump Price (nominal ¢/litre)......................................List of Figures Figure 1: Pump Price / Margin Model.....

.................... 1996 ........................... 13 Table 2: Taxes on Regular Gasoline on December 31...............................List of Tables Table 1: Downstream Sales Channels ...................................................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue................... 15 Table 3: Selected Study Markets .................................. 51 MJ ERVIN & ASSOCIATES ii ..................................................

The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. and a foundation for effective policy development. These prices are determined in a competitive marketplace. the Canadian retail marketing sector realized an average gross product margin of 3. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. each with unique MJ ERVIN & ASSOCIATES iii .5 cents per litre on the sale of regular gasoline in a typical major urban market. and ex-tax pump prices. supplier costs and profitability.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. together with a separate review of the refining sector.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.4 ¢ 19.5 ¢ 0.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.3 ¢ 28. and the Canadian Petroleum Products Institute (CPPI). This study.8 ¢ TAX 28.2 ¢ 24. Natural Resources Canada (NRCan).1 ¢ 5. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. 1996 Average Prices and Margins . represented by crude. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. dealer income. Price competition occurs at three distinct levels in this industry. rack.

and declined by 10 cents per litre measured in constant dollars. Convenience store. well over half of all outlets in Canada operate as lessees or independents. Approximately 16. due to its prominence in the public and media domain. which potentially allow for reduced margins at the gasoline pump. are examples of ways in which outlet petroleum sales are augmented by other revenues.000 in 1989. demand and other competitive factors existing at the time.dynamics. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. Dealers have a variety of relationships with their supplier. The resultant margins are therefore a reflection of the state of product supply. and the traditional automotive service bay. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI).500 retail outlets were in operation in Canada in 1995. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . From 1986 to 1995. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. and accordingly. this study focuses on the retail gasoline sector. nine of the past ten years. While each of these marketing channels operates in a competitive environment. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. car wash. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. compared to about 22.

both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. however. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . MJ ERVIN & ASSOCIATES v . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. From 1991 to 1996. This has both resulted in. as a consequence of refinery plant rationalization (closures) and a modest demand increase.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. As a result of these trends. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.crude) 5¢ Marketing Margin (retail .The “tax-included” nominal pump price increased over this same period. and has been a result of several factors including: • • • improved refinery utilization and efficiency.

When petroleum gross product margins were compared to their corresponding outlet throughputs. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput.Comparison of Canada. With few exceptions. With the participation of several CPPI member companies. rural markets. although this study provides an independent confirmation of this. and one by one. 19 markets representing a broad range of conditions. but also had significantly higher throughputs per outlet. That such a relationship should exist was not surprising. wholesale product cost and freight charges) were isolated from the pump price. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. to derive 1995 average petroleum gross product margins for each of the 19 markets. MJ ERVIN & ASSOCIATES vi . US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. A wide range of petroleum gross product margins were evident. This provided for market-bymarket and regional comparisons of key competitiveness indicators. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. several “outside variables” (product taxes. This was integrated with selected NRCan price data. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. were selected for a detailed review of outlet economics.

000.962 R2 = 0.6634Ln(x) + 76.000 5. head office and regional office overheads. smaller markets.6624 1.000 2. corporate charity. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. These costs would include salaries of marketing representatives and management.000. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. of which gross product margin and throughput are only two of several factors.000.000. and in major vs.000.000. etc. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . which reflects his investment in the outlet.000. This study showed that an average outlet net revenue in the 19-market study group was about $70.000 Volume (litres) 4.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. sales processing.000 3. and his personal labour investment. an additional goal of this study was to undertake a comparison of outlet profitabilities. and/or distributed to shareholders. brand advertising. not poor competition. the residual revenue is available as profit to be re-invested into retail operations. revenues from ancillary operations (eg: convenience store.• Smaller markets performed as competitively as larger centres. Consequently.. supplier profit: after the above costs are allocated.000 6. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.

000 per year. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.market study group. The Canadian retail petroleum products industry.000 vs. were insufficient to cover outlet costs.000) $(150. at 1995 prices. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. respectively. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . Although an objective measure of competitiveness is elusive.000) $(100.000) $(250.000 $150. for which this study had no specific data. and that petroleum sales revenues alone.000) $(350. Despite this difference.000 $100. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.000) $(200.000 $50. suppliers likely incurred a net loss on outlet operations in 1995.000 $200. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .$154.000) $(300.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. $61. distant outlets are clearly higher than those associated with concentrated urban markets. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Average Outlet Income (before marketing overhead costs) BC/PR $300.000 $250. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. by all objective measures available to this study. after allowing for estimated dealer profit and supplier overhead. 1.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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crude costs. 7. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. Thus. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. despite the predisposition of many observers to use them as such. Industry profitability is extremely sensitive to very small changes in pump price. virtually all of the 19 study markets exhibited similar levels of competition. although this study provides comprehensive evidence of this. Also.• • • improving production efficiency through refinery plant rationalizations (closures). While these economics might appear to place this industry in a position of poor viability. Also. these findings clearly show that pump price increases are ultimately linked not to increased profits. based upon an assumed posted rack price. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. and in turn. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. assuming all other costs were unchanged. Thus. most markets. regardless of size. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. Outlet throughput is a key determinant of inter-market pump price differences. but to increases in underlying rack prices. serve as perhaps the most significant indicators of competitiveness in the downstream industry. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). this industry sector would have realized profits of unprecedented proportions. and the associated industry initiatives which are ongoing in nature. Nevertheless. 8. When these margins were compared to their corresponding outlet throughputs. When plotted against the margin-volume model. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. That such a relationship should exist was not surprising. had petroleum margins which were commensurate with average outlet throughput for that market. Both the downward trend in margins. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Thus. A wide range of petroleum gross product margins were evident within the 19market study group. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . if Canadian average pump prices were only one cent higher than they were in 1995. in the long term these fluctuations are likely more reflective of market restorations. most outlets used in the 19-market study represent major integrated oil companies. Indeed. not excessive profits.

Smaller. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). reducing the number of outlets may also reduce the number of competitors. The loss of employment represented by a station closure may be of some concern to smaller communities. MJ ERVIN & ASSOCIATES xiii . the solution would be to encourage some dealers to exit the market. reduce pump prices. according to the margin-volume model. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. This created some economic pressure to sell product at a higher pump price.product margins than larger markets. poor outlet throughputs were generally the predominant factor. which should. The costs of most consumer goods in smaller. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. In suggesting this approach however. in order to build upon the findings in this study towards a full understanding of the dynamics at work. it would seem that if local government in smaller markets were interested in lowering pump prices. • • At first glance. average pump prices were relatively high. isolated markets face particular challenges: although found to be highly competitive. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. thereby improving petroleum volumes and ancillary revenues at the remaining sites. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. other factors exist which contribute to relatively high margins and prices. 9. which could actually inhibit competition. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. and this study showed that gasoline prices were no exception. While competitiveness in most smaller markets was shown to be as active as in larger centres. there are three points to consider: • • In very small markets. A full-serve retail gasoline outlet typically employs 3-5 staff. more isolated markets are generally higher than in larger centres. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study.5 million fewer litres of gasoline than a group A (major centre) station. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities.

and the perceived effect on their markets. depressed petroleum revenues. will likely preserve a highly competitive petroleum market. does not appear to benefit in consumer terms. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). MJ ERVIN & ASSOCIATES xiv . many national and local environmental regulations exist for good cause. has seen a decline in pump prices relative to other Canadian markets. and the traditional automotive service bay. and as such. This study proposes rather. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. Retail ancillary operations are a critical element of petroleum price competition. the degree of price competition in the retail petroleum has in effect. 11. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. The federal Competition Bureau for example. Convenience store. the Halifax market. are an acceptable limitation on pure competition (Finding 8). as marketers find even more innovative ways to attract market share. The historical record is clear however: since deregulating pump prices. is viewed as an agency which exists to the benefit of industry and consumer alike. direct regulatory interventions may have an adverse effect on competitiveness. car wash. is both the cause and consequence of increased activity in ancillary operations. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. sometimes below that of outlet operating costs. is well beyond the scope of this study. Also. that where a healthy competitive climate exists. and likely others in Nova Scotia. Charlottetown. characterized by narrow product margins and relatively flat pump prices. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results.10. under the current PEI regulatory structure. As these findings show. possibly to the detriment of the consumer. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. This competition then. and in turn. as it does in the Canadian petroleum marketing sector. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation.

margins and competitiveness factors. and the converse image held in much of the public domain. and the nature of competitiveness influences. in a simple format designed for consumers and legislators. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. A regular comprehensive competitiveness evaluation. along the lines of the model used in this study. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. not inhibit. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector.1. This should be in the form of a quarterly summary of price trends and related measurements. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Public perception measurement. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. • • MJ ERVIN & ASSOCIATES xv . Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. 2. Improve public understanding and awareness of competition in the petroleum marketing sector. using Canadian and foreign selected markets. Develop cooperative industry research into marketing sector competitiveness issues. using Canadian and foreign selected markets. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. petroleum marketing competitiveness.

and regulators alike. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. • * * * Better understanding of this industry. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. by industry. consumers. and in particular. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. MJ ERVIN & ASSOCIATES xvi . using Canadian and foreign selected markets.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and issues/opportunities facing such markets.

. and in the process. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.... . provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. face a number of challenges: a poor public image. Project Objectives The working group established as the primary objective of this study “. including a regional. A working group represented by Natural Resources Canada (NRCan).to better understand the competitive opportunities and challenges.to provide a sound database upon which more effective policy decisions can be made.. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. and regional differences which face the petroleum products retail industry. competitive pressures from US and offshore refiners. and in comparison to the Canadian national average and nearby USA markets”.to help the industry cope and to enhance competitiveness. leading to more effective policies and reduced uncertainty for future investment. and Industry Canada was convened to undertake this project. The SCF laid the foundation for supplementary studies. which comprise the “downstream” oil industry.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. In 1995. and MJ Ervin & Associates was selected to undertake the “rack to retail”. to name a few.to determine the key factors which drive competitiveness in specific markets. or even communities within the same region. Specific purposes of this study would be: • • • • “.Introduction Background Canada’s petroleum refining and marketing sectors. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. ..” MJ ERVIN & ASSOCIATES 1 .... the Canadian Petroleum Products Institute (CPPI). and a challenging array of potential environmental initiatives. and that issues and challenges be identified so that conclusions and recommendations can be made “.to analyze the rack to retail market and the market structure for refined petroleum products. region by region across Canada...to draw comparisons with nearby USA markets. or petroleum marketing portion of the study. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. and ..

in Appendix I. or which have a specific meaning in the context of this report. and a foundation for effective policy development. • Part E: Conclusions and Recommendations summarizes the study findings and. Supporting data to these charts can be found in Appendix II. Ultimately. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Specific comparisons of specific Canadian and US consumer markets were not made. It also relates consumer demand patterns to pump price fluctuations. and in order to provide insights into the range of competitive dynamics that can exist. Part C: Historical Trend Analysis provides an overview of prices. through a multi-faceted approach. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Many of the findings in this report are presented in graphical form.The study meets these objectives. undertaken as part of this project to: • make a more detailed examination of price. The study does provide comparisons with US markets on a national level of detail. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Findings are stated in bold and are summarized in part E of this report. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Part D: Selected Market Study presents the findings of a diverse 19-market study. and the effect of competitiveness on each subsector. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. due to the considerable data gathering difficulties that such an approach would entail. Unless otherwise stated. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. presents conclusions and recommendations which arise from the study findings. margins and demand patterns over the past several years. from which some important findings are made. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure.

Environment Canada. chaired the steering committee. and also participated in the steering committee. and Shell Canada. and provided critical guidance and feedback at several key stages in the process.. Finally. and their 481 retail associates whose outlet data was used in our analysis. including Ultramar Canada.. Suncor Inc. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. CPPI. through Maureen Monaghan and Huguette Montcalm. The Canadian Petroleum Products Institute. and Industry Canada. • • Several organizations participated in two key review sessions. We gratefully acknowledge these companies... Ministère des ressources naturelles du Québec. through Bob Clapp. Shell Canada. Natural Resources Canada. for their assistance. Consumers Association of Canada. These included: Canadian Tire Petroleum. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). NRCan.• Industry Canada. Imperial Oil Ltd. Suncor Inc. Petro-Canada. assisted in securing the support and participation of member companies in the selected markets phase of the study. Ontario Ministry of Environment and Energy. MJ ERVIN & ASSOCIATES 3 . facilitated some of the data gathering needs of this study. Petro-Canada.

price . texture. These relationships can be modeled. In fact. principally of motor gasoline. unlike many consumer products. most Canadians relate to this industry in one specific way: as consumers. And. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . and serves to explain several factors that together determine retail gasoline prices at any given time. multifaceted industry.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. or taste. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. but simply. the particular quality of gasoline which is of most interest to consumers is not its colour.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. as this study shows. Yet. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. It is this particular feature of petroleum products . To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. as they are in Figure 1. its price. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases.

So defined. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. these stakeholder revenues are derived from the revenue from the retail sale. gross margin represents revenue only. evaluating competitiveness is therefore a partly subjective process. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down.Many of the terms introduced and explained in this section are used extensively throughout this study. each essentially taking a share1 . (implying that the stated margin represents net income or “profit”). Each margin is quantified by its defining prices. it is important to define the term “margin”. an understanding of the term itself is necessary. Gross margin is simply the difference between two price points. this study examines competitiveness from the latter. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product).from the total pump revenue. this study’s use of the term relates to gross margin. A consumer however. Before examining each of the model elements. and in fact inextricably related. margins are squeezed or expanded accordingly. objective measurement for competitiveness. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. Ultimately however. From an industry perspective. MJ ERVIN & ASSOCIATES 5 . “competitive” may be synonymous with “viable”. While both perspectives are valid. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. consumer perspective.or margin . While this term is often associated with the phrase “profit margin”. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. is more likely to equate the term with “value for money”. any operating expenses must then be considered before making any determination of profits.

Technological change and innovation are the large levers of competition in industry. To achieve this. Accordingly. the degree of competition within a market. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. in order to maintain some level of brand variety. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. the result of price competition is reduced profit. it can frustrate communication and obscure analysis. one must ask how marketers compete. 1986: “Competition may mean very different things to different people.” “. Conditions for a competitive market can be deemed to exist when: • • more than one. or in other words. is the only real option in the long term. More importantly. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. represents a process by which prices are set.Unlike many business or economic concepts. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). Inevitably. reducing costs. The actions by business rivals place an upper limit on the prices a firm can charge for its products. competitors can either restore higher prices or reduce costs.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. if market conditions allow a sufficient number of players to remain profitably engaged. Price competition.” Price Competition in the Oil Industry In order to assess competitiveness. Competition can only be sustained therefore. improving efficiencies. a universally acceptable definition of competitiveness is elusive. and the entry of new competitors and new ideas. as competitors seek to attract market share through lower prices. An effective functioning of markets also permits smaller competitors to expand if they meet the test. in the sense in which it is something in the public interest. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . provide some means for comparing the type and to some extent... and unless care is taken to use the word precisely. and ideally many entities offer the same or similar products (brand variety). Simply put. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. this usually requires a reasonable number of competitors. Since a competitive market effectively limits the price option.

some organizations have operations in two or more of these markets. the “oil industry” consists of two distinct industries: the upstream industry. the most effective of these as a competitive tool is price. whose main 1 E. Nevertheless.the variables at their disposal.44 (1st Dec.. is false. particularly in the crude (upstream) industry and refiner sector. 4th Ed. competition in the crude and rack markets deserves some mention. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. and are beyond the scope of this study. It is also important to stress that the market ultimately sets rack and retail pump prices. The converse notion that the industry establishes a “should be” margin. whose main activity is the exploration and development of crude oil. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. Basic Marketing: A Managerial Approach. and are generally known as integrated oil companies.: Richard D. and the downstream industry. or four P’s: Product. and Promotion. the geographic scale of competition is an important consideration. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. which in turn defines the margins. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. MJ ERVIN & ASSOCIATES 7 . Price. the raw material from which gasoline is made. In fact. and in retail markets. (Homewood. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. in rack markets. and as will become more evident in this study. 1960) 2 Although distinct. so a brief description of these. most Canadians relate more in terms of retail gasoline marketing. Within the broad context of the oil industry. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. Jerome McCarthy. A refiner in Toronto may well compete with a refiner in Buffalo. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. Irving. • Thus described. p. Ill. The dynamics of upstream and refiner competition are major studies in themselves. New York. commonly known as the “marketing mix”1. which in turn defines a proper market price. Place. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. Given the commodity nature of petroleum products. 1971).

Canadian producers must compete to sell their production to refiners. alongside major producing countries such as Saudi Arabia.activity is the refining of crude oil into petroleum products. due to variables such as crude quality. it is important to examine its relationship with its neighboring downstream industry. production. and refinery production methods. Although this industry is not the focus of this study. Infrastructure The upstream oil industry encompasses a broad range of operations. our crude prices rise and fall according to price benchmarks established far beyond our own shores. implying that it fluctuates. as a minor contributor to the world crude supply. from the exploration for potential crude or gas reserves. Canadian producers have virtually no influence over world crude prices. Canadian producers are known as “price takers” rather than “price setters” of crude prices. its marketing operations). this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. which gives an accurate portrayal of month-to-month crude price fluctuations. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. MJ ERVIN & ASSOCIATES 8 . which finds and produces crude oil . In providing historical comparisons of crude to rack/pump prices. in several commodities trading centres around the world. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. gasoline grade. The upstream industry’s crude price is represented in Figure 1 as elastic. consequently. and in the open market structure that exists in Canada. it is probably sufficient to say that. Within the scope of this study. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. rather than a fixed value. While this study focuses on the downstream industry (and in particular. and transportation of crude oil to the refinery plant. that is to say. drilling. which it does on a continuous basis.the raw material from which gasoline is made. and the delivery and sale of these products to the consumer. Crude oil is a commodity which is traded in a global marketplace.

and from this feedstock. and some attention to the refiner sector is therefore given here. put simply. in the petroleum sector. and hopefully realize some production. who manufacture petroleum products from crude oil. and pay out royalties to the resource owner. From this revenue. day-to-day plant operations are cost-intensive.While some suggest that the price of gasoline should rise and fall exactly with the crude price. as a factor of the regular gasoline retail pump price. As a general measure: Finding 2: 1996 average crude price. involving energy. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. crude is only one of several factors that influence pump prices. and numerous safety and environmental safeguards. personnel. buy refined products from the refiner and sell them to the end-use customer. is called the refinery. In addition. oil producers must explore for potential reserves. and lubricants. manufactures a range of refined petroleum products including gasolines. maintenance. As is typical of many manufacturing organizations. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. which in oil producing provinces such as Alberta. This sector acquires crude oil. its predominant feature is the plant facility which. heating fuels. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. diesel. drill for. is the provincial government. The focus of this study is on the marketing sector of the downstream petroleum industry. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. or roughly 34 percent of the pump price. MJ ERVIN & ASSOCIATES 9 .1 cents per litre. was 19. A modern refinery is a sophisticated work of engineering. and marketers who.

there would be little or no market-driven competitiveness in the refiner sector. transfer price . some clear competitiveness indicators exist. For simplicity. confidential terms between the seller and specific buyers. the gross refiner margin is the price at which the refiner sells its refined product. While refineries are always rack price points. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. which may cause Gross Refiner Margin to be slightly overstated. the gross refiner margin is elastic.this is the “internal” price charged by a refiner to the marketing arm of the same company. For a competitive rack market to exist. the relative competitive strength of any given rack market is difficult to assess. contract price . If for example. refiners sell their product under a variety of arrangements. as this price point exists within the marketing sector. indicative of a competitive wholesale rack market. but with no material effect upon the Gross Product Margin derivation.Price/Margin Model Elements For simplicity.the price charged for immediate supply on an “as available” basis. less the price at which it bought its raw material2 (rack price minus crude price). many of which do not have integral refineries. they use rack price as their basis. Although contract and transfer prices are distinct from rack price. Since both crude and rack prices fluctuate according to market forces. and a return on the considerable capital investment in the plant facility. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. this model only uses the benchmark crude value. On a national basis however. reflecting the cost of transporting the crude from the producing region to the refinery plant. In fact. external measurement of the current market value of a particular petroleum product. Contract and transfer prices are not openly shared. only rack price information is readily available in the public domain. 2 MJ ERVIN & ASSOCIATES 10 . This margin provides for plant operating costs as described above. and accordingly. which can be broadly categorized as follows1: • • • rack price . In simple terms. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. The existence of rack price in a given market is not of itself. representing major Canadian population centres. 1 Dealer Price is not included here. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. since the market-driven rack price provides an objective. as they relate to negotiated. which provides an independent and objective determination of rack-based gross refiner margin. Of these three refiner prices. Wholesale volume data is not readily available on a market-specific basis.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. In fact the refiner typically pays a higher price than the benchmark crude price. being squeezed or expanded between these two price points. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. not the refiner sector.

even overseas. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. 1 Based on Octane Magazine Retail Outlet Survey data. would produce better than expected refiner income. but at the expense of marketing income. In examining the structure of the Canadian refiner sector. the question of the internal selling price. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market.000 km) for overland truck transport.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . In practical terms. as there is no obvious market mechanism to regulate its setting. and which supply petroleum to about one-third of all retail outlets in Canada1. due to the relatively small transportation cost. who themselves do not refine petroleum products. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. or close to. Canadian refiners must therefore be price competitive not only with each other. most refiners also participate in the marketing and retailing of petroleum products. for example. and in the case of gasoline. to so-called “independent” petroleum marketers. MJ ERVIN & ASSOCIATES 11 . in order to maintain realistic accountabilities within each of the two sub-sectors. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). integrated refiner-marketers establish transfer prices at. many US and European refineries are in practice. The mechanisms that drive rack prices are more fully discussed on page 36. market-driven rack prices. As shown in Figure 15 (page 35). to major industrial consumers. who compete for a share of this demand. but where pipeline or marine fuel terminal facilities exist. market-driven Rack (wholesale) pricing of petroleum products. from any one of several regional refiners. this limits a marketer to a relatively short range (perhaps 1. wholesale refined product is bought and sold across very large distances. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. In practice. In these cases of so-called “integrated” refiner-marketers. potential sources of wholesale product supply for most Canadian non-refiner marketers. or transfer price. Integrated Refiner-Marketers In Canada. but with their US and European counterparts. petrochemical producers. arises.for example. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply.

as a popular and relevant “window” on the petroleum marketing sector. product is sold from a central facility. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. • • MJ ERVIN & ASSOCIATES 12 . and purchase at or near the established rack price. It is this sector which has direct contact with the petroleum consumer and it is this sector. Marketing operations within this sector can be broadly classified into three elements. trucking. in the minds of many consumers. Wholesale Sales to a wide variety of customers. which “sets” the retail price of gasoline. each with its own distinct infrastructure. or in the case of cardlock facilities. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. farming. Retail Sales to the domestic motorist. including mining. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. and who essentially deal directly with the refiner. gasoline price and competitiveness issues attract considerable public. the most recognized element of the downstream oil industry. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. principally into commercial trucking operators’ vehicles. home heating. media and regulatory attention. and aviation. Within this industry sector. For this reason.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model.

at a negotiated contract price. Sales of home heating fuels to residential furnace oil customers. to the motorist consumer. In major centres dedicated Home Heat centres provide this service. usually involving some aspect of the marketing sector infrastructure. to the aviation fuel consumer. often delivered by pipeline or ship/barge. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Direct sales generally do not involve any marketing sector infrastructure. Retail outlets are operated in a variety of modes. Sales of petroleum products through bulk sales outlets. using delivery tank trucks. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. typically at the “rack point”. one final element of the pump price model must be reviewed. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Before examining this sector in detail.500 retail gasoline outlets in Canada. Sales to commercial and industrial accounts by the wholesale marketing sector. Sales to non-refiner petroleum marketers. There are over 1. which is generally less than the rack price. by delivery tank truck. and regular gasoline in particular. and usually supply customers by delivery to the customer’s own storage tank. in smaller centres. There are about 16. Sales to spot buyers at posted rack price. as discussed. heating fuel delivery is an integral part of a bulk sales outlet. which primarily serve long-disttance truckers and commercial delivery and haulage operators. There are over 850 cardlock outlets in Canada. MJ ERVIN & ASSOCIATES 13 . These outlets usually have considerable inventory capacity.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. such as product transport and/or storage.300 bulk sales outlets in Canada. Sales of aviation fuels at major and secondary airports across Canada. as principal elements of petroleum marketing operations. Sales to major industrial accounts. according to the contractual relationship between the supplier and the dealer. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. for example. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier.

in a small number of markets. If the pump price decreases for example. or roughly 50 per cent of the pump price. MJ ERVIN & ASSOCIATES 14 . The petroleum industry acts as a collector of these taxes. A three-cent drop in pump price. the tax content of retail gasoline in Canada has increased steadily over several years.2 cent (0. municipal taxes. stable amount. for example. tax content does fluctuate somewhat with pump price changes. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.6 cents per litre (Canada 1996 10-city average). As part C of this study shows. and seven percent GST. PST). typically made up of: • • • • a ten cent per litre federal excise tax. the tax content of the petroleum price is essentially a pre-determined.3 in Quebec) drop in the tax content. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. provincial sales tax. regardless of market conditions. which amount to 28. would include a roughly 0. 1 Due to the application of GST (and in Quebec. Table 2 shows the provincial tax content for retail gasoline.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin.

6 22.0 9.3 Federal Excise Tax 10.5 Total Tax 24.0 14.5 12.1 32.3 20. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.2 10.5 6.0 10.0 16.1 25. MJ ERVIN & ASSOCIATES 15 .5 cents and 4.0 4.0 15.0 10.4 3.0 cents is charged in the greater Victoria and Vancouver areas respectively.6 3.6 3.3 27.0 10.0 28. All Quebec gasoline sales are subject to a 15.8 4.5 cents was introduced in the Montreal and surrounding area in 1996.7 3.0 11. An additional pump tax of 1. Provincial Tax 11.0 27.0 3.3 10. plus a 6.6 3.0 10.0 10.7 13.5 3.0 10.7 18.5% sales tax applied to the GST-inclusive pump price.7 30.0 10.0 10.2 24.0 10.2 cent per litre pump tax.0 3.0 GST content (7% of pump) 3.6 3.9 3.0 10.6 25.0 10.5 14.Table 2: Taxes on Regular Gasoline on December 31.8 note 1 note 2 An additional tax of 1.0 10.2 24.0 28.

and the retail gasoline sub-sector in particular.1 cents per litre. MJ ERVIN & ASSOCIATES 16 .3 cents per litre. or 34 percent of the pump price. The residual.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. some profit return for the shareholder. this section provides a view of the Canadian petroleum marketing sector.3 ¢ 28. based on regular unleaded gasoline.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.2 ¢ 24. Figure 2: 1996 Average Prices/Margins .8 ¢ TAX 28. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. including retail outlet distribution. Refiner operations realized 5.5 cents per litre (after freight cost).Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).1 ¢ 5. operating modes. namely the dealer’s costs and income.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. It also provides an overview of the industry in terms of several infrastructure parameters. to derive a representative value for regular gasoline gross product margin in Canada. This 1 Prices and margins reflect a Canadian 10 city average. or 50. Upstream operations realized 19.6 cents per litre. 3.4 ¢ 19. and potentially. and ancillary operations. the brand supplier’s costs. or 9 percent.5 ¢ 0.3 percent of the average regular gasoline posted pump price. was available for product marketing operations.

Bloomberg rack price values were used as the assumed wholesale price. it falls into the domain of the marketing sector. was 3. In referring to marketing margins and product margins. See page 10 for further explanation. was 5. and is often out-sourced to third-party common carriers. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. and it is depicted in Figure 1 as a fixed cost element. and is then transported to the retail outlet.5 cents per litre.3 percent of the average urban price of regular gasoline in Canada. Although many petroleum marketers conduct their own freight operations. which in the case of retail gasoline. three key findings can be stated: Finding 4: Finding 5: In 1996. Freight MJ ERVIN & ASSOCIATES 17 . Freight cost does not typically fluctuate. In 1996. and rack price. petroleum taxes accounted for 50. The marketing sector then. or “rack to retail” margin. is defined by the marketdriven price points of ex-tax pump price. as part C will describe.3 cents per litre. this is seen as a “non-core” business. In 1996. Both refiner and marketing margins have been in decline over the past several years.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. the finished product (gasoline. is usually the gas station. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. for example) is sold/transferred at the current rack or transfer price. is the second of two elements of the downstream oil industry. The gross marketing margin. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. As the product leaves the refinery plant. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Based on the 1996 data.

000 per outlet. As represented in Figure 3.costs are generally less than one-half cent per litre in most major Canadian cities. but at an average cost of over $200. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . rural markets experience higher pump prices than do larger centres.3¢ 3. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. and is therefore a poor comparative tool. Posted pump price includes all of these variables. which are typically close to a wholesale rack point.6¢ Refiner Operations 5. This is a particularly useful measurement in comparing retail gasoline markets. • Product sales: Within this domain.8¢ Pump Price) Upstream Operations 19. together with gas station dealers. Gross product margin is therefore defined as gross marketing margin less freight cost. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). as it excludes the “outside variables” of tax. Unlike most other retail enterprises however. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. as it represents 80% of all retail gasoline sales.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. typical of any retail business.5¢ Product Operations Freight 0. and upstream/refiner margins. storing and dispensing a product such as gasoline adds considerably to the operating cost.1¢ Tax 28. petroleum marketers. freight.5 cents per litre in 1996. incur a variety of costs. Figure 3: 1996 Average Regular Gasoline Margins (56. an average gross product margin for regular gasoline in a major Canadian city was 3.

In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. RUL prices are therefore most often cited when relating historical price trends. Basic Marketing: A Managerial Approach. it represents a very small percentage of total retail petroleum sales. Higher octane grades are more expensive than RUL. commonly known as the “marketing mix2. expanded product/services offerings such as convenience items. The grade differential varies somewhat from city to city.44 (1st Dec. p. seasonal blends. Place. etc. Although revenue from this product is factored into the study market economics in Part D. • Product In the past decade. page 24). a number of factors preclude this type of strategy. Today. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. additives. propane vs. A portion of the market certainly responds to this type of competitive strategy. This study does not examine such a broad issue however. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. or when comparing price levels between markets. and accordingly. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. and the price difference between these grades and the RUL price is referred to as the grade differential. In order to measure competitiveness. and Promotion. gasoline). 1 Diesel is another petroleum product sold at many retail outlets. 2 E. but in 1995 was typically 5 cents per litre for midgrade. Place Typically. marketers have attempted with some success to differentiate their product offerings from other brands. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Simply put. 1960) MJ ERVIN & ASSOCIATES 19 . 4th Ed. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content.). Ill.retail gasoline sales respectively1. Today. Irving. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. one must ask how marketers compete.” or four P’s: Product. competitive strategy of this type focuses heavily on selecting the best place. will ultimately purchase based on price. marketers compete to be represented in as many and/or the best locations as possible. Price. Price competition has forced marketers to optimize outlet revenue. marketers compete for the consumer’s choice of transportation energy (for example. but most consumers view gasoline as a commodity. Jerome McCarthy. and 9 cents per litre for premium gasoline. (Homewood..: Richard D. 1971). rather than the most places. as gas stations proliferated. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline.

it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. At its extreme. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. As such. This study presents an extensive historical and comparative analysis of pump prices. gasoline is a commodity. Promotional activity seems to have decreased in the past few years. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. price has proven to be the most widely used competitive tool by gasoline marketers. MJ ERVIN & ASSOCIATES 20 . In this context. and therefore “trades” within a relatively narrow price range. due to the largely commodity nature of petroleum product. this study examines the dynamics of price competition in considerable detail.• • closure of non-viable outlets. their subsector margins. and due to the already slim margins available to marketers. volatile prices . fluctuating pump prices are a significant indicator of robust competition among marketers. volatile pricing manifests itself in the form of a price war (see below). uniform prices . free item with purchase or special price item with purchase. Consequently. Establishing an objective measurement of price as a competitiveness indicator however. Examples are: • prominently displayed prices . promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. gasoline is viewed by consumers as a commodity uniform in quality and widely available. caused by price competition. is less clear. Examples of promotional competition are: • • • brand identity gasoline discount coupon. • • • While examples of all of these indicators are abundantly in evidence. and more importantly. low prices and/or margins. probably due to its relatively high cost. price clearly remains the predominant competitive tool used by Canadian gasoline marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. • Price In most markets.contrary to some public perception. Promotion In the gasoline retailing sub-sector.

there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. since they too must restore their gross product margins to sustainable levels. the relationship between the supplier and dealer is generally as described on page 25. obviously at the expense of the supplier margin. the wholesale rack price. who then react quickly to the change. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. the effect on many consumers is immediate: they will drive into that station. assuming that the rack price is unchanged. or even less than. since there is no “dealer margin”. or even undercut the competitor’s lower price. the supplier may temporarily intervene. its effect is to restore some measure of the dealer margin. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. for example). are indicators of a competitive market.where the ex-tax pump price is equal to. Pump prices therefore tend to move uniformly within a very short time. If one dealer decides to reduce pump prices (by two cents. bypassing the higherpriced outlet. Whether through falling pump prices or rising rack prices. If the posted price increase is too high. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. one must adopt the perspectives of both consumers and competing. facilitated through street price signs. or when prices rise or fall apparently in unison. Pump price signs are an ubiquitous feature of the retail gasoline industry. When this occurs. adjacent dealers. The other dealer has little choice but to quickly match. This is a misconception. 1 This does not occur at company operated or commission outlets. in order to maintain a reasonable market share. and provide to the dealer what is commonly referred to as price support. competitors will likely match this price. but to competitors. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. While this support may take one of several forms. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. In the case of lessee or independent dealers however. The effect of this upon the gross marketing margin is obvious: it is squeezed. in an attempt to gain market share. To understand the phenomenon of uniform pump prices. MJ ERVIN & ASSOCIATES 21 . or even being squeezed to zero . competitors may not follow. Price Support In times of “normal” pump prices. Finding 7: Price uniformity and price volatility.When pump prices are uniform.

resulting in 9 convictions. There are few current examples of direct government intervention in the pricing of petroleum products. the petroleum marketing sector has been the subject of several inquiries at federal. An examination of the effect of the Competition Act. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. Following a year-long investigation. however. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. or of direct government intervention in marketing. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. These cases have largely involved local dealers and/or isolated incidents. While this study does not intend to undertake a detailed review of the effect of the Act. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. control over retail pump price effectively reverts to the supplier. 1997 MJ ERVIN & ASSOCIATES 22 . the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. In addition. provincial and even municipal levels. but reverts back to the dealer when the support arrangement is ceased. In addition. which is administered by the federal Competition Bureau (Industry Canada). 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. and a brief discussion of this case appears in part D. More recently. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. A review of historical retail pump prices in the Halifax.Under the provisions of some price support mechanisms. the Bureau found that there was no evidence to support these allegations1. is beyond this study’s scope.

So defined. particularly in smaller population centres. it is clear that government policy plays an important role in facilitating. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. The high cost of building a modern retail gasoline outlet for example. inhibit competition. Many smaller retail owner-operators. This issue is discussed more fully in part D. or incentive for. higher pump prices. entry into an attractive market. one can cite examples of regulatory obstacles to exit from the retail gasoline market. MJ ERVIN & ASSOCIATES 23 . promotes or limits market-driven pump prices. a competitive climate. for safety and environmental protection. A practice. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. and at least some of this capital cost is regulatory compliance-driven. as outlined above. As a product group however. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. in the form of standards for the decommissioning of retail petroleum sites. creates an obstacle to. accounts for about 37% of all refined petroleum demand in Canada. These regulations clearly exist to the benefit of all. but exist to meet other important societal needs. is in part.500 retail gasoline outlets across Canada. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. and is the single largest market for gasoline products. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. Conversely. it is the single largest one. accounting for roughly 88% of all gasoline demand. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. or incentive for. that is. to some degree. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). It is important to acknowledge that many regulations affecting the retail gasoline industry. creating a need for higher margins. exit from an non-viable market.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. Retail gasoline sales. and consequently. or inhibiting. sales of gasoline through the roughly 16. accounting for 41% of all petroleum demand. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil.

as shown in Figure 5.6% Other Gasoline 4.3% Total Sales Volume: 84.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. This study provides an estimate of the actual retail outlet population.7% Lube/Grease 1.2% Propane /Butane 2.2% Asphalt/Coke 4. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.it has no practical means to enumerate each and every outlet.9% PetroChem Feedstocks 5.2% Other 0.9% Diesel Fuel 22.2% Retail Gasoline 37.7% Light/Heavy FuelOils 14. This survey accounts only for major established retail networks . Figure 5: Canadian Retail Outlet Population .

exist between retail dealers and their suppliers. or modes.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1.500 in 1995. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14.000 outlets in 1989. The supplier. to about 16. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . Distribution of these outlets by province (Figure 6. as one might expect. controls the setting of the pump price. and all inventory and revenues belong to the supplier.The estimated number of retail outlets in Canada has declined from 22. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. as owner of the product. using Octane counts only) is roughly equivalent to population densities. the retail outlet is owned and operated entirely by the product supplier. who holds initial title to the refined petroleum as it leaves the rack point. The principal dealer and attendants are salaried employees of the supplier. Several possible relationships. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. and the dealer. and this is of some importance with respect to the matter of prices and competition in this sector. and usually owns the brand name seen at the retail outlet. who manages the day-to-day operations at the retail outlet.

Control of Pump Price Dealer Compensation supplier a commission from the supplier. and pays them from his commission revenue. an employee of the supplier supplier supplier typically the dealer. supplier salary from supplier. the outlet facilities and petroleum inventory is owned by the supplier. the supplier retains control of the retail pump price. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The “dealer” is in essence. usually based on cents per litre of petroleum sales. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . The dealer in turn hires attendants.sub-component margins . but the outlet operator (“dealer”) is compensated by a commission payment. who pays all outlet operating costs. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. Since the supplier owns the petroleum product at this type of outlet.the entire gross product margin accrues to the brand supplier. based on pump sales volume.

and has control over the retail pump price. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. MJ ERVIN & ASSOCIATES 27 . The dealer pays most or all of the expenses associated with operating the outlet. This dealer margin is defined as the pump price (ex-tax). The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition.product from the supplier at a “Dealer Wholesale” price. The margin between these two prices is the dealer’s gross revenue. and in turn resells to the motorist consumer at a higher pump price established by the lessee. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. not the supplier. and sells at the posted pump price. can vary considerably from one supplier to another. unlike rack or pump prices. and means of compensation supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. This Dealer Price. since it is predicated on contractual arrangements between the dealer and the supplier. dealer-established retail price. and sells at the posted pump price. the retail facilities are owned by the dealer. The margin between these two prices is the dealer’s gross revenue. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. less the Dealer (wholesale) Price charged by the brand supplier.

or Imperial Oil). some general figures are mentioned here. 1 Unless the dealer is under a price support arrangement (for instance. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Petro-Canada. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. The remainder represent one of over 50 different marketer organizations. In addition. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. virtually none of the major integrated outlets are company operated. MJ ERVIN & ASSOCIATES 28 . This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. and fully two-thirds operate as lessees or independents. during a price war) as previously described. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. who themselves establish pump prices. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price.

Figure 8 depicts the Canadian representation of several key ancillary services. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Improved outlet revenue from ancillary operations has caused. Many outlets have more than one ancillary offering: many “flagship” outlets for example. average annual throughputs ranged from under 1 million litres in smaller population centres. Canadian throughputs have dramatically improved in the past several years . to over five million litres in major markets such as Toronto.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken.While an average outlet throughput may be in the order of 2.5 million litres. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. These improved outlet throughputs have provided for improved petroleum revenue potential. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. In effect. Based on a sampling of outlets surveyed in this study. which in part has led to a reduction in retail product margins. ancillary service has had the consequence of subsidizing the pump price of gasoline. more fully described in part C. has had a profound effect on the retail gasoline marketing sector. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . and is a result of. Most ancillary services are operated by the dealer/lessee. feature both a large-area convenience food store and a modern car wash facility. these study findings show that this can vary widely from market to market. In fact. reduced petroleum margins. The proliferation over the past two decades of ancillary services such as convenience stores and car washes.

While some of the presented findings are selfexplanatory. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. An “all markets” average. MJ ERVIN & ASSOCIATES 30 . As such. Unless noted. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. many utilize terms which are explained in part A. Since rising prices are common to most consumer goods and services. Regional and market-to-market comparisons are presented in greater detail in part D. particularly around 1990. Since 1 Data is not regularly collected on smaller markets. as can be seen in part D of this study. the “Canada average” price reflects an average of urban markets only1. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. using a Canada 10city weighted (by provincial demand) average. prices are for regular unleaded (RUL) gasoline. This part examines broad trends in several areas. when the Persian Gulf War caused crude prices to increase significantly. including smaller markets. an examination of the specific historical record of gasoline prices is useful. mainly using Canada average values. This shows that pump prices have increased in nominal terms.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. would be somewhat higher. and with which the reader should be familiar.

ex-tax equivalent prices. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. as defined in part A of this study. It also depicts the associated margins. and relative crude cost. retail pump prices were about 7 cents less in 1995 than they were in 1986. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. Figure 10: CPI Index Comparison . In constant dollars. rack price. When compared to other consumer goods. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. When pump prices are reduced by the amount of tax content. nominal pump prices decreased. as in Figure 10.1990. MJ ERVIN & ASSOCIATES 31 . Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs.

as Figure 11 shows.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. If. it simply passes on a fixed cost margin to determine the “correct” pump price. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. In fact. which in turn. as the next section shows. and have risen slightly since 1994. Margin History While Figure 11 provides an indication of key price trends. and the rise in the tax content. as shown in Figure 12. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. the downstream industry operates on a “cost-plus” basis. that is. which are defined by the price points. as might be suggested. Figure 12 shows that industry margins have not been constant over time. nor do rack prices exactly follow crude costs. due to additional market factors which affect pump and rack prices at any given point in time. the presence of these additional market factors have operated to the benefit of consumers. and in fact have displayed a declining trend over the past six years. MJ ERVIN & ASSOCIATES 32 . are principally a reflection of changes in the underlying price of crude oil. it is also useful to examine the behavior of margins. It is important to state that pump price changes do not occur in exact lock-step with rack prices. then one might expect margins to be quite constant over time.

Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. In particular. A more thorough discussion of specific market factors for these and other centres appears in part D. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. since the chart is based on monthly averages.crude) 5¢ Marketing Margin (retail . emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. the gross marketing margin can fluctuate quite significantly1. Finding 13: From 1991 to 1996. This shows that on a monthly basis. which have both shown a consistent decline throughout the period 1991 to 1996. several factors. The decline in refiner and marketing margins has both resulted in. 1 In fact. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. and has been a result of. not weekly or daily data. the actual fluctuation is much more pronounced than shown. compared to the Canadian average. this upward trend is not attributable to “downstream” refiner or marketing sector margins. as local competitive factors act to self-regulate pump prices. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. MJ ERVIN & ASSOCIATES 33 .

Canadian pump prices have been roughly equal to. is presented in Figure 14. if not all of the difference in pump prices between Canada and the US. for several years. although Canadian pump prices in urban markets are clearly higher than in the US.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs.Figure 13: Monthly Gross Marketing Margins. this is wholly attributable to the difference in taxation. This shows that. US Price History The retail gasoline tax structure in Canada is vastly different than the US. resulting in significantly higher Canadian gasoline prices. or even less than. On an ex-tax basis. A comparison of Canadian and US regular gasoline pump prices. with and without tax. This difference accounts for most. US pump prices. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 .

Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Canadian ex-tax pump prices were historically somewhat higher than in the US. which is reflected in US average pump prices. largely as a result of two factors: • Canadian marketing margins have decreased in this period. when compared on an ex-tax basis. From this it can be seen that Canadian and US rack prices. This is no longer the case however. both a cause and an effect of improved throughputs and ancillary revenues as previously described. This would be a useful area for further research. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. trading at any given time within a relatively narrow (about 2 cents per litre) range. • Although this study shows that on an ex-tax basis. page 24) and somewhat increased demand. RFG has not been introduced to Canadian markets. Canadian outlet throughputs (although likely still less than those of the US). Figure 15 compares these values for selected Canadian and US centres over a period of several years. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. as a result of outlet closures (see Figure 5. behave in a very similar fashion. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Prior to 1994. and moving up or down more or less in unison. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . have improved considerably. While these trends have also occurred in the US.

any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 2. Figure 16: Monthly Demand vs.700. rising and falling closely in step with demand. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.300. Price History Figure 16 shows the history of Canadian gasoline demand.000 24¢ 1. Yet in the latter half of each year. as demand ebbs and inventory improves. and as would be expected in any commodities market under these conditions. and prices tend to fall. not only in a given market. As non-refiner marketers attempt to secure a supply of this diminishing inventory. of motor gasolines from 1991 to 1996. compared to average ex-tax regular gasoline pump price for the same period. Demand vs.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. a “buyers market” develops. or sales.700. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).500.000 2. but in fact across the North American continent (US demand follows a similar pattern).000 1. or indeed anywhere.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. conditions begin to favour a “seller’s market”. the price tends to be bid upwards. Gasoline price exhibits a similar.000 1. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . increasing significantly every spring.000 2.500. and falling in the latter half of each year. Simply put.100. albeit less distinct pattern. Pump Price (nominal ¢/litre) 3.000 2.000 34¢ 2.900.100.900. Gasoline demand exhibits a very regular seasonal pattern.

while average ex-tax pump price declined by 14% (since 1994. pump prices have increased due to a significant rise in crude costs in this period). and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. This part of the study presented a number of historical views of retail gasoline prices. so do prices. On a long-term basis however.3%.Whether in the spring or the fall. competing to meet their own needs. All of the findings suggest that. demand rose approximately 8. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. has operated in a highly competitive environment. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. This is of course. a feature of most marketregulated commerce. as evidenced by declining industry margins. The traditional supply-demand model predicts that when demand rises. which ensures a competitive product price for buyer and seller alike. the downstream petroleum industry. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. gasoline prices have not followed the traditional model. MJ ERVIN & ASSOCIATES 37 . the essence of a free market economy. in that prices have fallen. and product taxes which add to the consumer price of gasoline. their related product costs and margins. Figure 16 shows that from 1991 to 1995. despite a rise in demand. which consists of the refiners and marketers of gasoline and other petroleum products. while world crude prices and Canadian taxes have generally increased over the past several years.

although one was subsequently dropped due to insufficient submitted data. play a role in a market’s pump price. outlet costs.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. • Methodology Selection of Markets A number of markets were selected for the study. These “outside factors” tend to obscure the more relevant aspect of pump price. and in order to provide insights into the range of competitive dynamics that may exist. and pump prices alone provide very little opportunity for “comparability”. and a more detailed examination of price. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. ancillary revenues. MJ ERVIN & ASSOCIATES 38 . Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. A number of factors such as taxes. etc. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. freight. outlet volumes. is useful in providing broad overviews of industry price and margin trends. Nineteen markets were therefore adopted for the study (Table 3).. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. namely product margin. there is no regular monitoring of pump prices in smaller centres.

are influenced not by one. MJ ERVIN & ASSOCIATES 39 . Furthermore. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. Process Overview As illustrated in part A. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. Petro-Canada.000. it was essential to obtain data not normally available through existing public sources. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences.Each market was classified according to regional affiliation (BC/Prairie. these organizations provided market-level data on freight costs. In all. or “rack to retail” sector. price history data not available through public sources. 2 Depending upon the outlet mode. Suncor Inc. retail pump prices . In addition. Shell Canada.and consequently competitiveness . To examine the competitiveness of the marketing. and Group B markets less than 500. and for smaller markets.. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market.0001. Five companies responded to this request: Imperial Oil. retail outlet and brand representation. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. but a number of variables. Ontario. To this end. and Canadian Tire Petroleum. the gross marketing 1 Although White Rock is clearly not a major centre by itself. the gross marketing margin must be examined in isolation from those other variables. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500.

and freight were successively removed from the pump price. weighted by sales demand. a broad representation of markets was possible. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. For each market. Where applicable. MJ ERVIN & ASSOCIATES 40 . Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. in addition to operating cost and ancillary revenue data gathered in the study1. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. as the “blended” price includes other product grades. Using the derived gross product margins and volumes for each market. by product grade. and freight. 2 Accordingly. rack price. 1995 average values were determined for pump price. 2. to arrive at “blended” values2. The gross product margin thus serves as an interim basis for comparing study markets. and the final “rationalized” gross product margin was determined for each market. 3. including some smaller centres.margin is stripped of its freight component. From participant company supplied data. Group B (smaller market) and 19-market study averages. tax content. to derive the 1995 average gross product margin for each of the study markets. 1 Although outlet cost and ancillary revenue data was not available for all markets. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). these were weighted by volume. average outlet annual throughput was determined for each market. The variables of tax content. Finally. rack price. This allows for an accurate determination of net outlet revenue. Where differences in gross product margin might still exist. a market-by-market profile of outlet income is presented. average pump prices are higher than actual average regular gasoline prices.

. 6. and gross product margins are therefore likely to be understated. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. it is important to understand that the use of rack price in this analysis has certain implications. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. This variation is constant across all nineteen markets however.to determine average consolidated net revenue per outlet. 7. Supplier Overhead costs. 5. marketing margin. these 19 markets represent a combined population base of 8. represent a broad range of markets. MJ ERVIN & ASSOCIATES 41 .. and supplier profit. perhaps by 1 to 2 cents per litre. as described on page 10. freight. Interpretation of Data In some smaller centres. accurate comparisons are possible. objective data exist for both of these values.7 million. and from one brand to another. . and accordingly represent a broad spectrum of consumers and marketers.. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. etc. product margins.. or consolidated net incomes. Also. but they are relatively minor. including relatively smaller ones such as Sioux Lookout or Gaspé.4. This value was then applied to the gross product margin to determine average outlet petroleum revenue. Bloomberg rack price values were used as the assumed wholesale price. The derived weighted average values of pump price. so that on a cents-per-litre basis. and outlet operating costs were deducted from total revenue. grade differentials were based on known differentials of nearby markets. Unlike retail pump prices however. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. These differentials do vary from one market to another. also considering that RUL constitutes the majority of product. petroleum revenues. a recognized source of data on world crude oil and petroleum markets and prices. and therefore where assumptions were made. In referring to marketing margins. Wholesale refined product prices used in this study are therefore likely to be overstated. the effect on the “blended price” is small. A dollar-per-outlet estimate of these elements was made. many wholesale petroleum purchases are made at less than the “posted” rack price.. encompassing a significant portion of the entire Canadian market. From participant company data. While clear. average revenues from ancillary services were added. When these margins are applied to outlet throughputs as in step 4 above.

Rack prices used in this study are nevertheless market-driven. The study data suggests that variations in tax rates account for a significant part of pump price differences. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. The first of these variables to be examined is tax.64 cents per litre in pump price. accurate. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. MJ ERVIN & ASSOCIATES 42 . and based on objective. there is little to suggest why such a high variance exists. The 19-market study group exhibited a statistical variance1 of 17. while lower prices tended to prevail in major centres.8 cent difference in pump price 1 See footnote at Appendix II. higher priced markets are associated with smaller population centres. The data also shows that typically. table J for an explanation of how variance is derived. broken into tax and extax components. independently gathered data. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. but a variance of only 12. A 6. Tax Figure 19 shows posted pump prices for the study markets. The data shows a statistical pump price variance of over 17 cents per litre within this study group.38 cents per litre in ex-tax pump price.

This eliminates any effect that tax variability may have.while all markets are subject to the same rate of federal excise tax and GST1.less than one-half cent per litre. The data shows that taxation between markets within the same province varies little. as described in part A. accounting for roughly half of the average retail price. Montreal). Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. MJ ERVIN & ASSOCIATES 43 . Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28.75 cents per litre (Vancouver. taxes were a significant element of pump price. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. while taxation between provinces is more pronounced .tax. namely the upstream industry and refiner sector. additional elements of the revenue stream must be further isolated.between Calgary and Vancouver for example. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. it is therefore more useful to use ex-tax pump prices when comparing any two markets. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. was less than three cents. when examined on an ex-tax basis. provincial tax rates can vary greatly. GST content can vary by market. but the variance is minimal . 1 Due to pump price differences. Figure 19: Pump Price . thus providing a better basis for comparison. In all study markets. or when examining historical price trends.

differ little from those of major centres. if a clear understanding is to be achieved. the rack price is set at the rack point (Winnipeg. When rack price is deducted from the ex-tax pump price. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. it should be restated that each of these sectors. rack price) and gross marketing margin elements. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. as is examined below. Freight costs are additional. To address this. are clearly delineated by market-driven crude. rack and pump prices. MJ ERVIN & ASSOCIATES Cents per litre 44 . the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. but ultimately. Furthermore. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group.assuming transport costs did not outweigh the price difference. the validity of analyzing gross marketing margins in isolation might be raised. This is due to the fact that for any market. as this would cause rack buyers to bring product in from the lower-priced region . in the case of Thompson). reflecting some differences in refinery crude acquisition costs.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. reflecting the reality that at the rack level of competition. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. one region cannot maintain rack prices at a higher level than another. and their respective margins. the rack price is equivalent to the upstream margin plus the refiner’s margin. and therefore are best analyzed separately.

as low as 0.3 cents per litre. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. and therefore a significant pump price factor. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. in fact.0 cents per litre. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. with their component freight costs.16 cents per litre (gross marketing margin) to 7. For markets which are also established as rack points. this freight cost is almost negligible. remote population centres. the data shows that freight is often a significant part of the gross marketing margin. Before using this as an analytical tool however.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Figure 21 shows a study market comparison of gross marketing margins. it is therefore important to eliminate the freight variable from the gross marketing margin. Two of the study markets had freight costs in excess of 3.49 cents per litre (gross product margin). it is essentially a “non-core” business. resulting in comparative gross product margins. particularly in comparisons of major urban markets to small. Although freight operations are often an integral part of many petroleum marketing operations. For other. To provide a comparative view of the marketing dynamics within the study group. generally smaller markets. one final outside variable must be isolated: that of product freight. MJ ERVIN & ASSOCIATES 45 . Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.

5 cent per litre average relates to regular gasoline in major markets.5 cents). it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. or between any two regions.a variance of only 2. at 14.68 cents per litre1. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.the gross revenue available to the petroleum marketing sector for its operations. product margins.06 cents per litre.17 cents per litre. Gaspé. at 3. MJ ERVIN & ASSOCIATES 46 .6 cents) to the variance in their component gross product margins (7. or consolidated net incomes.22 cents per litre Smaller markets showed a wider variance in gross product margin . while Group B markets averaged 7. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. while Toronto.5 cents per litre average Gross Product Margin cited in Part B. 1995 gross product margin averaged 5.6. Bloomberg rack price values were used as the assumed wholesale price. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.42 cents per litre. Group A (larger population) markets averaged 5.5 cent variance in gross product margin is still significant however. to the resultant retail gross product margin . For all study markets.68 cents per litre. as the 3.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. was the lowest. A 7. petroleum revenues.95 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets . was the highest of the study group. In referring to marketing margins.

2 cents per litre in Gaspé. an examination of related outlet throughput volumes is necessary.000. If these two factors are related to each other as they are in Figure 24.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000 litres per year (Toronto). Indeed.000. if any retail gasoline outlet located in the Toronto area for example.000 2. Figure 23: Average Annual Throughput per Outlet 6. vs.000.1 cents per litre in Toronto.000.14. a wide range of variability still exists between markets in the study group .000.000 5.000 4.000. 3.000 litres per year (Sioux Lookout) to over 5.000. sold significantly less than 5 million litres of petroleum per year.differences between markets. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000 Litres 3.000 1. ranging from under 700. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. for example. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. A wide range of volume performance is evident. it would likely be so unprofitable as to be un-viable. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. once isolating retail gross product margin from all of the “outside” pump price factors. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.

it follows that higher gross product margins will be the consequence. the Group A market outlets had roughly 50% more throughput than Group B outlets .42 cents) than smaller (Group B) population centres (7. Although MJ ERVIN & ASSOCIATES 48 .a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. compared to 2. Regionally.000. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000 2. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. while those with high Gross Product Margins tend to have low outlet throughputs.000.000 3.000. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. Smaller markets perform as competitively as larger centres.000. With few exceptions.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.000 6. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.000.000 5.95 cents). not of poor competition. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. If all outlets in a given market experience generally low throughputs.that is. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.Figure 24: Outlet Volume vs.962 R2 = 0. As most outlet operating cost are fixed in nature .6634Ln(x) + 76.4 million litres annually.000. they remain essentially the same regardless of volume changes .6624 1. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000 Volume (litres) 4. On average however. all market groups (BC/Prairie. Ontario.7 million respectively.

and ultimately shows that very little difference in competitiveness exists between any two markets. less outlet costs. however.000 2.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. and auto service.000. supplement their incomes with other revenues. as described below. averaged $69. Consolidated Net Revenue per Outlet To create a complete. this is likely due to the higher incidence of Group B study markets within this region. Gross product margin. car wash. Ancillary revenues are those derived from non-petroleum sales sources.716 . and the resultant consolidated net revenue. which.000 6.000.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). It represents the residual revenue which is available to the dealer and to the supplier.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. supplier overhead costs. such as convenience stores.000 4. These additional factors clearly have an effect on the relative competitiveness of retail markets. and must be examined. Figure 26 summarizes total outlet petroleum sales.000 5.000. and supplier MJ ERVIN & ASSOCIATES 49 . while operating costs are those costs which are directly incurred in the operation of the retail facility. which for the study group. Figure 25: Outlet / Volume Relationship . competitiveness occurs between retail outlets. In reality.000.000.000 3. ancillary sales.000. outlet-based view of retail markets. in addition to petroleum sales.the revenue available for dealer income. and incur many expenses in the course of their commerce. two additional factors are introduced: ancillary revenue and outlet operating costs. is only a measure of petroleum revenue per litre. product cost.

The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.profits. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . In effect. Costs. and his personal labour investment.Group B outlets were not as profitable as these revenue values might suggest. MJ ERVIN & ASSOCIATES 50 .000 $250.000 $200. As described above.000) $(350. causing the weighted average for Quebec / Atlantic to be depressed). Table K). An examination of these component elements reveals a significant finding: that for most markets. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.000 $50.000) $(250.000 per year respectively .000) $(100. Figure 26: Outlet Revenues. as explained below. A discussion of the ultimate distribution of this revenue is useful. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. which reflects his investment in the outlet. reduced pump prices.000 vs.000) $(300. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 $150.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. $60. Most markets showed relatively similar net revenues (see Appendix II. Income BC/PR $300. these ancillary operations contributed to a lower product margin and consequently.000 $100. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.$154.000) $(150. Finding 19: Based on published rack prices.000) $(200.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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and with access to wholesale product by several means.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price .000 barrel per day plant located in the greater Vancouver area. contributing to a higher than average pump price.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. The somewhat high margin placed this market slightly above.Vancouver population # of brands # of outlets outlets per 10.745 18 446 2. Low consolidated net revenues may have contributed to the higher margin. this market has access to numerous refiners along the Pacific coast through marine supply. This may explain the somewhat elevated gross product margin in this market. and also has local refining capacity. but well within a cluster of markets with similar throughputs. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Influence of other markets: Although relatively close to the US border.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Geographic / Supply / Freight cost considerations: As a port city.658. Vancouver is also a terminal for a refined products pipeline from Edmonton. net outlet revenues were less than those of other major centres.ex tax Canada Average . a 60. ranking 11th.968 litres 7. while average throughput ranked 4th. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.000 1.542. Overall. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.98 ¢ 0. Vancouver provides several perspectives into retail marketing. Vancouver collects a 4 cent per litre municipal tax. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . as described below. Figure 28: Vancouver .38 ¢ 7.

Influence of other markets: Although this market is a border-crossing community. but less than most markets with a small population base. Vancouver. Average outlet throughputs were relatively high. adjacent to the United States border. this market is subject to a 4 cent per litre municipal tax.000 16. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. prices in this market have historically mirrored those of Vancouver. gasoline “cross-border shopping” is less pronounced than might be expected.630 litres 7. prices. MJ ERVIN & ASSOCIATES 55 . This market is close to its usual rack point. White Rock’s margin was typical of markets with similar outlet throughputs. Freight costs were accordingly low compared to other small markets in this study. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Price history / Taxation: Although no specific data is available. Despite its relatively small size. due to its proximity to one.White Rock population # of brands # of outlets outlets per 10.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. the study data found little to suggest a material effect upon representation.315 4 8 4.604. at least in this market.45 ¢ 7. This is likely due to the fact that unlike many smaller markets. Geographic / Supply / Freight cost considerations:. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. and retail gross product margin was less than that of markets with a similar population base. or competitive dynamics.98 ¢ 0. Like Vancouver. This suggests that. the White Rock retail gasoline market displayed the same attributes as a major urban market. thus providing some unique characteristics for the market study. White Rock is essentially part of a major market due to its proximity to Vancouver. In all respects. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.

24 ¢ 6. Figure 29: Calgary . pump prices in this market have historically been well below the Canadian 10-city average. which was one reason for selecting Calgary as a study market. Indeed. indicative of a strong competitive climate. Product is usually sourced from Edmonton refineries via pipeline.ex tax Canada Average .827. Rack-to-outlet freight costs are among the lowest in the study group.47 ¢ 0.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.Calgary population # of brands # of outlets outlets per 10.719 litres 6. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.675 27 313 4. Some smaller markets in the vicinity have occasionally priced below Calgary. Consolidated net revenue: was typical of other major markets in the study group.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Calgary pump prices are very close to the Canadian average. Calgary is of sufficient size to support a viable rack market. creating some competitive pressures (see Nanton).Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Influence of other markets: Calgary is fairly remote from US and other major markets. Other considerations: Of the markets studied. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Price history / Taxation: As the figure below shows. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Calgary had the third highest number of retail brands.000 710.

Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Figure 30: Regina . and is therefore a recognized rack pricing point. Consolidated net revenue: was typical of other similar markets. and a history of volatile pump prices. Although no supporting data is available. supply/demand is likely more balanced.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Since 1993. this market is removed from other significant markets. Ex-tax prices are also above average. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.21 ¢ 7.ex tax Canada Average .180 15 86 4.50 ¢ 0. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.Regina population # of brands # of outlets outlets per 10. and this market is now more typical of other large population centres.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .000 179.089. margins and throughputs were typical of other markets with a similar population base.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. price volatility has eased. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. and therefore experiences no particular influences from any other major market. which are among the highest in Canada. Influence of other markets: Like Calgary. Regina was of some interest as a study market. Since then. This is partly due to provincial taxation levels. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.794 litres 7.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.

this market is removed from other significant markets.22 ¢ 7. Influence of other markets: Like Calgary. like most markets of this population density. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. Price history / Taxation: In the early 1990’s this market experienced some price war activity. probably related to a regional surplus of wholesale inventory (see Regina).Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . though somewhat higher than average ex-tax pump prices.06 ¢ 0.ex tax Canada Average . this market has exhibited relatively stable pricing. although. possibly due to modest ancillary revenue.Winnipeg population # of brands # of outlets outlets per 10.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and therefore experiences no particular influences from any other major market. Figure 31: Winnipeg .000 616. Since then.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .217 litres 8. This may reflect a lower than average Consolidated Net Income. and has remained very close to the Canadian 10-city average. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. prices have tended to stay somewhat above the Canadian average. it is an established rack price point.790 17 261 4. On an ex-tax basis. although there is no study data to support this.265. Consolidated net revenue: No ancillary or outlet cost data was available for this market.

585 4 5 31.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. it is likely that low operating costs. MJ ERVIN & ASSOCIATES 59 . Influence of other markets:. In this respect. Unlike many of the smaller markets in this study group. Nanton has traditionally priced either at or below Calgary. as Figure 24 shows.600. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.41 ¢ 5. and perhaps healthy ancillary sales associated with highway traffic. placing Nanton well below the expected margin. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.Nanton. Nanton was perhaps the least viable market in the study group. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. While these conditions would normally result in a high gross product margin.000 1. although not as low as expected. due to its proximity to one.000 litres 5.91 ¢ 0. Despite its small size. more isolated small-town markets. Alberta population # of brands # of outlets outlets per 10. Nanton was the smallest market in terms of population. Due to its highway location and its proximity to Calgary. situated on a major North-South highway to the United States Among the study group. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. the retail gasoline market in Nanton was not restricted to the local population. in order to maintain a share of the considerable potential sales revenue that passes through this market. a feature not available to other. Nanton had the second lowest gross product margin of the study group. this market has a relatively low freight overhead. Nanton appeared to benchmark its pump prices to those of Calgary. in terms of expected petroleum revenues. the Nanton retail gasoline market displayed the same price attributes as a major urban market. while others experience consistently high prices.the highest of the entire group . Price history / Taxation: In order to attract market share beyond simply the local population. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Average outlet throughputs were relatively low. Consolidated net revenue: No Ancillary or cost data was available. Nanton had a high number of per capita outlets . Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack.far in excess of what would be expected of a community with a population of 1.071.and a low average outlet throughput. would have an offsetting effect.

Geographic / Supply / Freight cost considerations: At 1. Supply is via tanker truck from Edmonton.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. and was accordingly chosen as a study market.6 cents per litre. MJ ERVIN & ASSOCIATES 60 . its normal rack point. though fairly typical of many smaller. Peace River has among the highest freight cost in the study group.45 ¢ 1. high pump prices. further adding to overall high pump prices. this market has little or no influence upon.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. experiencing relatively high gross product margin and consequently.623 litres 12. Influence of other markets: Since it is not located on a major inter-urban thoroughfare.715 6 8 11. other markets. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.000 6. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. isolated markets.6 ¢ 10. and due to its isolated locale in northern Alberta. nor is it influenced by. Alberta population # of brands # of outlets outlets per 10.157. they were comparable to other markets with similar average throughputs.Peace River. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. In contrast to Nanton. and in fact fell into a tight cluster of four other study markets. Peace River also experiences high freight costs. isolated markets. Price history / Taxation: Peace River is typical of small.

high pump prices. isolated markets.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. Although ancillary revenues were the smallest of the study group. thereby creating the potential for narrower margins. Thompson is among the highest freight costs in the study group. Other considerations: Like other small markets. This however. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. and reduced pump prices. These factors resulted in relatively strong per-outlet net revenues.02 cents per litre. other markets. Although outlets in Thompson appear to be as competitive as those of any other study market. its usual rack point.014.975 5 6 4.Thompson. a significant portion of which would likely be distributed towards supplier overhead costs. nor is it influenced by. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. Geographic / Supply / Freight cost considerations: At 3.000 14. resulting in per-outlet petroleum revenues which were quite typical of many markets.02 ¢ 11. Consolidated net revenue: Low outlet throughputs were offset by higher margins. Supply is via tanker truck from Winnipeg.520 litres 14. remote market. MJ ERVIN & ASSOCIATES 61 . outlet costs were also modest typical of most smaller markets.1 ¢ 3. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. It also experienced high freight costs. the community of Thompson clearly falls into the category of a small. Thompson is faced with the dilemma.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Manitoba population # of brands # of outlets outlets per 10. they were comparable to other markets with similar average throughputs. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. and due to its isolated locale in northern Manitoba. Influence of other markets: Since is not located on a major inter-uban thoroughfare. Price history / Taxation: Thompson was typical of small. and in fact fell into a tight cluster of four other study markets. further adding to overall high pump prices. experiencing relatively high gross product margin and consequently. this market has little or no influence upon.

Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. and a resultant low consolidated net revenue. On an ex-tax basis however.000 2. With an average “blended” gross product margin of only 3. In addition. similar to that of Montreal.478 litres 3. thus there exists a climate of robust competition.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .Toronto population # of brands # of outlets outlets per 10. it is likely that outlet ancillary revenues are among the highest in the country. as evidenced by an exceptionally low gross product margin. it had the second highest brand variety of the study group. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. New York.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. Influence of other markets: This market is continuously linked with several other major retail markets.3 ¢ 3. this market ranked first in a number of measures: lowest gross product margin. stretching from Pickering to Buffalo.36 ¢ 0.098.275. It consequently has a low freight component. and is also relatively close to wholesale supply sources in the US. Figure 32: Toronto .ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. this market was consistently less than the 10-city average.extax Toronto Posted Price .06 cents per litre. and first in average throughput per outlet. least number of outlets per capita. This is likely offset by high operating costs. Margin/Throughput relationship (Figure 24): This market stood apart from the study group.775 30 546 2. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. Within this region are thousands of retail outlets. Consolidated net revenue: Although no study data was available for this market.

Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. rural markets co-exist in this area.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .948 litres 5. exhibiting all of the characteristics of robust competition. slightly lower that expected. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. Consolidated net revenue: was low. and operating costs were higher than most.004. Figure 33: Ottawa . Influence of other markets: Although Ottawa is the only major market in the immediate area. some of which have on occasion priced below Ottawa (see Nanton and Calgary). freight costs within this market were quite low. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . several smaller.145 19 209 3.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.000 678. in fact. Other considerations: While pump prices in this market were somewhat higher than in Toronto. Although petroleum revenues were typical of major markets. and close to the Canadian 10-city average.29 ¢ 5. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. ancillary revenue was slightly lower than average.97 ¢ 0.ex tax Canada Average .Ottawa population # of brands # of outlets outlets per 10.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.

Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. a consequence of the transport distance from the rack point. this Canadian market has some difficulty in remaining both competitive and viable.475 10 24 2. This would suggest that a significant market share is being lost across the US border. Sault Ste Marie is a sizable market. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.Sault Ste Marie population # of brands # of outlets outlets per 10.22 ¢ 7. somewhat isolated.73 ¢ 1. and between 5 to 8 cent per litre in gross product margin. Freight costs are therefore high.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.465. average throughputs were modest. MJ ERVIN & ASSOCIATES 64 . a product of relatively strong net petroleum revenues combined with lower than average operating costs. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. yet with some potential for cross-border retail competition. partly due to higher freight costs. and accordingly.000 81. Influence of other markets: This market is close to a US border market. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Pump prices in this market were thus typical of any market with similar throughput characteristics.550 litres 8.

It therefore presents some unique characteristics for the market study. despite its high prices. in fact the second highest in the study group. brands. MJ ERVIN & ASSOCIATES 65 .310 3 3 9. one-seventh the average throughput in Toronto.006 litres in 1995. An average outlet in Sioux Lookout pumped only 694. with little or no influence from other retail gasoline markets. so that virtually all sales volume represents local demand only.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. this market experiences a high degree of price competition. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. largely due to higher freight costs. although high. Consolidated net revenue: No data was available for this market. and outlet throughputs of any market studied.Sioux Lookout population # of brands # of outlets outlets per 10.96 ¢ 3. Sioux Lookout is well-removed from any major highway.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.066 litres 14. and had the least number of outlets.2 ¢ 11. This would suggest that. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Freight costs are therefore high. was much less than expected for a market of this size. This is a major factor in the high cost of gasoline in this market.000 3. Influence of other markets: This is clearly an isolated market.

394.3 ¢ 5. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. with resultant low average outlet throughputs.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . thus promoting a competitive climate.000 1.5 cents per litre was introduced into the Montreal area). this market interacts with several other markets in the region. On an ex-tax basis however. This.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. With 32 competing brands.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .870 32 866 4. Figure 34: Montreal . and is also relatively close to wholesale supply sources in the US.775. Montreal was included in the selected market study.extax Montreal Posted Price . pump prices in this market have a tendency to be volatile. placed Montreal lowest of all study markets in terms of consolidated net revenue. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. this market ranks first of the study group in terms of brand variety. combined with low petroleum revenues and high operating costs.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. pump prices in Montreal have generally been at or below the 10-city average for major markets. an additional tax of 1.Montreal population # of brands # of outlets outlets per 10. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.144 litres 5. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. a function of a competitive rack market and an excess of retail outlets competing for market share. Influence of other markets: Like Toronto. It therefore represents a highly competitive rack market. Price history / Taxation: As the figure shows.43 ¢ 0.

Nevertheless. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. this market has little potential as a rack market. MJ ERVIN & ASSOCIATES 67 .75 cents per litre. both pump and ex-tax prices in this market were higher than average. but as the figure shows. but is quite isolated from any other markets. Consolidated net revenue: was average among the study group.000 120. were quite typical of markets with similar populations. yet is geographically quite isolated.250. In the case of Chicoutimi. for example). by tank truck. although low. Freight costs are therefore somewhat high. within a cluster of other markets with similar attributes.605 14 97 8. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.289 litres 12. Margin/Throughput relationship (Figure 24): Outlet throughputs. Gross product margin was accordingly high.28 ¢ 1.Chicoutimi population # of brands # of outlets outlets per 10. this amounted to a reduction of 5. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. a partial factor in the high cost of gasoline in this market. Chicoutimi is normally supplied from the Quebec city rack.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.08 ¢ 11.

this margin was only slightly higher than expected for a market with these throughput attributes.Gaspé population # of brands # of outlets outlets per 10. in the case. a product of high freight costs and gross product margins.17 gross product margin the highest of the study group. This is a major factor in the high cost of gasoline in this market. with little or no influence from other retail gasoline markets.400 6 13 4.33 ¢ 14. a key factor contributing to its 14. Consolidated net revenue: No data was available for this market. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. so that virtually all sales volume represents local demand only. amounting to a reduction of 5. Gaspé is well-removed from any major highway.75 cents per litre. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. ancillary revenues would likely be modest.000 16.900 litres 17. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Although operating costs are likely to be low in a small market like Gaspé. both pump and extax prices in this market were higher than average. Nevertheless. by tank truck. Influence of other markets: This is clearly an isolated market. Nevertheless.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Freight costs are therefore high. located at a considerable distance from its rack source of supply. in fact the highest in the study group.50 ¢ 3. MJ ERVIN & ASSOCIATES 68 .

Since provincial taxes are among the lowest in the country. with or without a local refinery. which for Saint John. it is an established rack point. reflected in the high ex-tax pump price.27 ¢ 9. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. and is capable of shipping and receiving wholesale product through marine facilities.Saint John NB population # of brands # of outlets outlets per 10. That a major refinery resides in this market might suggest that these prices should be among the least in the country.79 ¢ 0.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. the Saint John retail market is relatively isolated from other retail markets of any significance.ex tax Canada Average .694 litres 9. Nevertheless.095. In fact. do not differ markedly from any other rack point in the study group. Accordingly. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.000 74. Average gross product margin was consequently high. this market fell within the expected range of gross product margins as a function of outlet throughput. retail pump prices are ultimately a reflection of rack prices. Consolidated net revenue: was average for the study group. Saint John presents some unique characteristics for the market study. ex-tax prices were relatively high. resulting in lower than expected average outlet throughputs. Figure 35: Saint John NB . Price history / Taxation: Historically.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.extax MJ ERVIN & ASSOCIATES 69 .970 9 56 7. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. and therefore. posted pump prices in the Saint John market have closely followed the 10-city average. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. freight costs in this market are low.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price .

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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....... ............ the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.. 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.................... are principally a reflection of changes in the underlying price of crude oil. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied........................... given the possibility of discounts from posted rack prices and potentially lower overhead costs... 33 Finding 13: From 1991 to 1996.................. 48 Finding 19: Based on published rack prices............ 71 MJ ERVIN & ASSOCIATES 73 .... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness.......................... these ancillary operations contributed to a lower product margin and consequently............................................ . 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.. a feature of most market-regulated commerce...... The viability of the Canadian retail gasoline sector as a whole may be somewhat better............ ................................. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements...............................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products......................... and likely a negative impact on consumers....... the residual represented a net loss to the supplier..... while those with high Gross Product Margins tend to have low outlet throughputs........................................................... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads............. reduced pump prices....... ............. which ensures a competitive product price for buyer and seller alike................. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences....... which in turn............................. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.............. 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences... .. when compared on an ex-tax basis............... particularly in comparisons of major urban markets to small.................. .............................. 50 Finding 20: For the 481 individual outlets studied.......................51 Finding 21: Based on published rack prices and the individual outlet data...... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs....... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.................... the profitability of the 481 outlets studied appears only marginal..................... In effect....... remote population centres............ while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre........ residuals for outlets not studied may be better....................................

which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. was observed (Finding 10). a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. is mistaken. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . 1. in comparing Canada average (city) pump prices to those of the United States. 2. when taxes were excluded (Finding 14). price is but one of four competitiveness “tools” available to marketers (product. when measured in constant and nominal dollars. and promotions are the other three). exhibited a diminishing trend (Finding 13).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. Rack and pump prices are determined in competitive marketplaces. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. Although an objective measure of competitiveness is elusive. Virtually all of the competitiveness indicators examined in this study relate to price. the very margins within which this industry operates has. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). This has not simply been a result of a decline in underlying raw materials costs. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). over the long term. The study presents such a model. by all objective measures available to this study. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. On a national level. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. was shown to be strongly competitive: • A long-term decline in pump prices. each with unique dynamics. The resultant margins. In comparing several diverse markets. Canadian prices have been at or below US prices in recent years. As described in this study however. The Canadian retail petroleum products industry. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. place.

while crude oil markets are considered global in scope and rack product markets are considered regional in scope. presents a competitive disadvantage to Canadian marketers. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). provincial. MJ ERVIN & ASSOCIATES 75 . A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and do. it is important to understand that. when the “outside” factors (tax. crude costs accounted for roughly 34 percent (Finding 2). experienced higher than average pump prices. and in some markets. but even in such cases. or 6 percent (Finding 6) of the 1996 average regular pump price. refiner margins accounted for 5. but also rack prices and outlet performance. Taxation is a significant factor in the price of retail gasoline. Due to the localized nature of competition in the retail gasoline marketing sector.even negative values. rack price and freight cost. but given its magnitude. taxation as an element of public policy is an area worthy of additional research. Petroleum product taxes are levied at the federal. and accordingly. taxation differences between Canadian and US markets. This implies that the competitive dynamics pertaining to these retail markets can. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. these markets have managed to sustain a certain level of viability and competitiveness. and in some markets. Dealers were shown to have a variety of relationships with their supplier. municipal levels of government. and are a predominant cause of inter-regional pump price differences (Finding 16). In applying such a model to the retail petroleum marketing industry. measured against the average outlet throughput for that market. 3. The latter two can vary considerably from one market to another. vary considerably from one population centre to another. generally do not serve as competitiveness inhibitors. This would entail the tracking of not only pump price. The demonstrated exception to this is in markets directly adjacent to nearby US markets. By contrast. or even between Canadian markets with differing tax structures. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market.5 cents. retail petroleum markets are considered local (municipal) in scope. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. particularly smaller ones. an exercise that consumers are unlikely to engage in.3 cents or 9 percent (Finding 5). for example) were rationalized. and product margins accounted for 3. since this is the effective range of consumer choice. demand and other competitive factors existing at the time. are thus a reflection of the state of product supply. While some markets. well over half of all outlets in Canada operate as lessees or independents. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

dealer income. 4. Retail gasoline marketing revenues. which in turn. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. 5. is available to provide for all retail marketing operations including outlet costs. This consolidated outlet revenue. incorporated with ancillary revenues and outlet costs. when distributed these three ways (Finding 20). Pump price fluctuations can be an indicator of competition in the marketplace. This margin represents gross revenue (after wholesale product and freight cost) which. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. a price-stable market. Demand for gasoline was shown to vary significantly according to the time of year. exhibited competitive traits typical of any of the study markets. and a loss in the case of urban markets. Rack prices were shown to not significantly differ between major centres. the Canadian retail marketing sector realized an average gross margin of 3. second only to the United States. Retail pump price changes showed a close relationship to underlying rack prices. in a highly distinct.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. fluctuating prices are a strong competitiveness indicator (Finding 7). While price wars are undoubtedly an indicator of competitiveness. the absence of price war activity does not imply a lack of competitiveness. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). which represent the majority of Canada’s population base. supplier costs and profitability. on the basis of price fluctuation alone. Retail pump prices showed a corresponding seasonal pattern.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. on a per litre basis. when examined on the margin-volume model. and more price-stable markets such as Sioux Lookout. reflecting consumer demand behavior (Finding 15). Viewed from this perspective. showed a close relationship to underlying crude prices (Finding 11). While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. In fact. which in turn is the principal driver of ex-tax pump prices. The pump price/margin model shows that in 1996. MJ ERVIN & ASSOCIATES 76 . predictable seasonal pattern. Sioux Lookout. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. constitute a small portion of the retail pump price.

several competitive strategies. in the long term these fluctuations are likely more reflective of market restorations. including: • • • improving production efficiency through refinery plant rationalizations (closures). this industry sector would have realized profits of unprecedented proportions. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Since 1991. This trend has both resulted in. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. Industry profitability is extremely sensitive to very small changes in pump price. have caused. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. based upon an assumed posted rack price. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. not excessive profits. most outlets used in the 19-market study represent major integrated oil companies. and in turn. 7.6. despite the predisposition of many observers to use them as such. Both the downward trend in margins. Declining refiner and marketing margins. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. assuming all other costs were unchanged. Nevertheless. Indeed. these findings clearly show that pump price increases are ultimately linked not to increased profits. both of which are beyond the direct influence of Canada’s oil companies. MJ ERVIN & ASSOCIATES 77 . and have resulted from. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Also. Also. Thus. if Canadian average pump prices were only one cent higher than they were in 1995. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Thus. not price. crude costs. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). intense competitive pressures in the downstream industry in general. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. and has been a result of. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). While these economics might appear to place this industry in a position of poor viability. and the associated industry initiatives which are ongoing in nature. but to increases in underlying rack prices. despite increases in tax content and crude costs (Finding 12). and the marketing sector in particular.

reduce pump prices. Smaller. more isolated markets are generally higher than in larger centres. 9. In suggesting this approach however. which could actually inhibit competition. When plotted against the margin-volume model.5 million fewer litres of gasoline than a group A (major centre) station. • • At first glance. When these margins were compared to their corresponding outlet throughputs. it would seem that if local government in smaller markets were interested in lowering pump prices. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. although this study provides comprehensive evidence of this. according to the margin-volume model. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. That such a relationship should exist was not surprising. which should. The costs of most consumer goods in smaller. Although some smaller markets appeared to have higher gross product margins than larger markets. MJ ERVIN & ASSOCIATES 78 . Outlet throughput is a key determinant of inter-market pump price differences. had petroleum margins which were commensurate with average outlet throughput for that market. thereby improving petroleum volumes and ancillary revenues at the remaining sites. isolated markets face particular challenges: although found to be highly competitive. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. other factors exist which contribute to relatively high margins and prices. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). A wide range of petroleum gross product margins were evident within the 19market study group.8. the solution would be to encourage some dealers to exit the market. reducing the number of outlets may also reduce the number of competitors. average pump prices were relatively high. most markets. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. poor outlet throughputs were generally the predominant factor. regardless of size. While competitiveness in most smaller markets was shown to be as active as in larger centres. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. This created some economic pressure to sell product at a higher pump price. and this study showed that gasoline prices were no exception. Thus. there are three points to consider: • In very small markets. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. virtually all of the 19 study markets exhibited similar levels of competition.

As these findings show. is well beyond the scope of this study. Retail ancillary operations are a critical element of petroleum price competition. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). characterized by narrow product margins and relatively flat pump prices. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. This competition then. 10. Also. the Halifax market. in order to build upon the findings in this study towards a full understanding of the dynamics at work. does not appear to benefit in consumer terms. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. the degree of price competition in the retail petroleum has in effect. The historical record is clear however: since deregulating pump prices. The loss of employment represented by a station closure may be of some concern to smaller communities. depressed petroleum revenues below that of outlet operating costs. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. is both the cause and consequence of increased activity in ancillary operations. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. and the perceived effect on their markets. has seen a decline in pump prices relative to other Canadian markets. and likely others in Nova Scotia. is viewed as an agency which exists to the benefit of industry and consumer alike. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). are an acceptable limitation on pure competition (Finding 8).• A full-serve retail gasoline outlet typically employs 3-5 staff. under the current PEI regulatory structure. will likely preserve a highly competitive petroleum market. and in turn. 11. car wash. and the traditional automotive service bay. as marketers find even more innovative ways to attract market share. and as such. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The federal Competition Bureau for example. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. MJ ERVIN & ASSOCIATES 79 . Charlottetown. Convenience store. many national and local environmental regulations exist for good cause.

possibly to the detriment of the consumer. Improve public understanding and awareness of competition in the petroleum marketing sector. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. This should be in the form of a quarterly summary of price trends and related measurements. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. in a simple format designed for consumers and legislators. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. direct regulatory interventions may have an adverse effect on competitiveness. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. margins and competitiveness factors. Public perception measurement. Develop cooperative industry research into marketing sector competitiveness issues. petroleum marketing competitiveness. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. not inhibit. 1.This study proposes rather. that where a healthy competitive climate exists. A regular comprehensive competitiveness evaluation. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. 2. as it does in the Canadian petroleum marketing sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. and the nature of competitiveness influences. and the converse image held in much of the public domain.

A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. using Canadian and foreign selected markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. along the lines of the model used in this study. and in particular. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. by industry. consumers. MJ ERVIN & ASSOCIATES 81 . using Canadian and foreign selected markets. and issues/opportunities facing such markets. and regulators alike.

Appendices MJ ERVIN & ASSOCIATES 82 .

municipal tax levees. but inclusive of any corporate taxes on earnings. such as convenience goods. safety and business issues.. Downstream . service bays. MJ ERVIN & ASSOCIATES 83 . independent dealers.an organization who sells refined petroleum products to end-use consumers. etc.a generic term referring to a retail outlet operator.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. an association of petroleum refiners and marketers. diesel.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. health. Independent Petroleum Marketer . provincial pump tax. Dealer . and in some regions. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. and included in the retail pump price. and commission dealers. Usually expressed on a per-unit basis. The ex-tax pump price is exclusive of these taxes. such as lessees. There are several modes (see below) of dealer operation. for example. in cents per litre. such as a major oil company or regional refiner/marketer. car wash. Integrated Oil Company .a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. Lessee . currently established at 10¢ per litre. These product taxes include Excise tax. the regular unleaded pump price. CPPI . which serves as the voice of the petroleum products industry in Canada on environment.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. Distribution Costs .a petroleum marketer who is not involved in the refining of petroleum products. Ex-tax Pump Price .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry.the retail price of gasoline that would be displayed if all product taxes were removed. and therefore purchases its supply of petroleum product from an outside source. Marketer .Canadian Petroleum Products Institute. generally expressed in cents per litre.(for the purpose of this study) the cost. lubricants.I Glossary of Terms Ancillary service . such as a retail gasoline outlet. Margin . Excise Tax . Grade Differential .. GST. Major Oil Company .a service provided in addition to the basic retail petroleum sales operation.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. of transporting petroleum product from the rack point to the final point of sale. etc.the difference in pump price between a premium or mid-grade of gasoline vs.

it is usually based on the market-driven rack price.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. commission dealer. PCF . Regional Refiner/Marketer . Upstream . the raw material from which petroleum products are manufactured.the point at which title to refined product is transferred from the refiner to the supplier.Petroleum Communication Foundation.an organization who.the wholesale price posted at the rack point.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.the segment of the oil industry involved in the exploration and/or production of crude oil. usually per month or per year. Refiner .Mode . manufactures (from crude oil) a range of petroleum products suitable for consumer use. Rack Price . Throughput . Transfer Price . the supplier has initial title to the petroleum product as it leaves the rack point. Supplier .within the context of retail gasoline marketing. Although in theory the transfer price could be set at any arbitrary value. lessee. In the retail gasoline sector. and independent dealer. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. This may be at a refinery loading terminal.the type of contractual relationship between the supplier and the dealer (outlet operator). these can be broadly classified as company operated. an association of upstream and downstream oil companies and related organizations. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. MJ ERVIN & ASSOCIATES 84 . Rack Point .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products.

0 102.8 106.5 25.1 115.8 93.7 132.4 27.9 97.3 134.1 104.0 104.7 29.1 117.4 57.4 97.5 126.6 91.9 155.7 30.1 120.3 119.3 139.9 108.5 145.8 108.6 107.2 31.3 132.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.7 96.1 48.5 100.1 97.2 121.2 30.7 54.7 22. 62-010: Consumer Prices and Price Indexes.8 135.3 40.3 58.1 126.2 112.5 115.4 104.1 104.3 1992 128.3 96.2 49.4 104.5 120.0 42.7 124.0 1988 108.5 112.6 51.7 95.4 152. 1986 Constant (¢/litre) (3) RUL Ex-tax Price. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.3 125.6 136. Nominal (¢/litre) (2) RUL Ex-tax Price.4 34.5 30.1 105.5 111. Nominal (¢/litre) (2) RUL Annual Price.9 1993 130.0 93.3 160.3 52.3 55.8 47.2 92. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.5 124.2 127.3 151. No.9 26.2 99.0 32.5 49.6 122.3 141.7 118.1 151.9 1995 133.3 122.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.1 120.4 124.1 146.1 167.9 26.4 110.8 94.0 30.0 115.8 130.3 115.9 115.4 136.8 104.1 40.4 120.2 20.2 133.1 117.0 93.4 29.0 1991 126.3 1989 114.2 50.8 1987 104.1 144.4 53.6 133.9 118.8 28.3 27.9 1994 130.1 103.1 26. using a weighted (by provincial gasoline demand) 10 city average.8 132. MJ ERVIN & ASSOCIATES 85 . 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.2 142.0 97.2 45.8 95.3 19.2 45.2 109.7 122.0 135.4 134.0 111.4 122.7 123.9 122.5 94.4 45.0 19.6 92.2 39.1 87.1 1990 119.

8 25.5 23.7 29.4 26.2 41.4 30.0 16.7 18.9 13.0 33.9 26.6 26.9 55.9 55.1 21.0 16.4 26.7 19.4 12.9 25.1 17.1 13.2 4.1 7.9 26.1 23.4 31.3 56.7 58.1 5.2 29.2 7.7 33.0 16.2 27.4 15.7 12.7 25.2 25.7 7.9 14.0 28.9 23.9 25.4 13.5 26.4 24.8 9.3 5.7 29.6 21.5 25.2 65.6 25.9 25.1 16.8 16.2 7.8 55.4 26.5 7.3 23.2 11.9 25.8 8.9 7.1 53.8 28.4 58.0 22.0 26.3 13.3 6.2 8.7 7.5 54.8 23.9 15.6 54.8 24.3 42.8 22.3 4.4 8.9 4.4 24.0 15.5 26.7 23.3 54.7 39.9 54.3 13.9 12.7 8.1 25.5 33.0 26.8 29.1 9.5 Gross Marketing Margin Gross Refiner Margin 53.2 56.2 15.0 24.2 27.3 54.7 19.9 31.3 26.4 13.5 32.5 8.0 25.1 16.3 22.3 12.0 13.8 30.9 24.4 53.2 16.0 54.6 5.3 15.3 66.7 14.8 11.9 11.2 14.9 30.7 29.1 24.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.3 58.2 23.7 28.8 23.8 14.6 7.7 13.8 8.2 22.0 8.7 15.3 14.7 Downstream Margin 14.8 26.3 24.9 17.4 33.3 17.5 10.2 26.1 13.1 16.8 14.8 26.9 23.3 13.0 7.1 13.5 15.0 25.3 56.6 23.0 52.9 6.5 14.5 10.4 14.2 7.2 24.9 6.8 14.9 4.2 27.4 MJ ERVIN & ASSOCIATES 86 .5 19.3 22.1 29.1 19.6 9.7 14.9 14.3 54.0 9.0 24.4 14.8 33.4 9.1 52.3 6.8 57.8 53.0 16.9 22.4 7.7 14.7 6.0 14.0 20.6 25.5 5.6 13.0 24.2 13.1 22.9 25.9 9.7 32.4 56.0 26.4 29.5 6.7 34.6 20.5 14.5 27.9 56.0 24.5 57.1 39.6 8.9 23.9 21.5 23.0 24.3 9.7 4.1 7.4 14.0 10.5 7.3 Tax Content 23.7 4.2 63.7 14.2 6.1 53.Table B: Key Price / Margin History .2 14.6 26.4 55.4 14.0 7.2 13.7 7.6 13.7 63.6 24.4 20.7 18.2 7.0 55.4 34.7 14.3 26.5 27.8 55.6 52.5 23.7 4.5 22.9 53.3 13.1 18.0 7.7 24.6 54.2 12.3 15.0 5.6 54.7 31.5 11.0 24.9 56.9 8.8 53.5 31.0 4.8 13.2 25.5 30.8 15.2 5.9 7.2 26.5 56.5 35.6 18.9 53.9 6.3 13.1 22.2 16.1 16.5 28.4 31.2 13.1 23.9 7.2 6.6 28.5 16.0 12.4 21.8 14.4 57.0 24.6 4.4 32.2 21.8 21.3 25.6 23.1 23.8 21.2 23.6 26.9 58.2 13.6 6.1 18.4 22.3 57.

4 24.7 13.1 6.5 15.0 29.8 20.9 12.8 4.2 9.2 20.4 15.3 9.0 6.2 14.1 11.1 20.8 28.0 6.5 54.3 58.9 49.5 21.9 27.3 26.4 4.1 Gross Refiner Margin 7.2 23.1 10.3 13.1 61.7 52.2 20.5 20.5 5.7 6.3 26.6 11.6 9.0 57.9 5.1 14.1 15.0 28.0 12.0 14.3 9.2 12.0 28.1 26.3 21.3 26.6 23.5 5.9 Downstream Margin 12.9 14.6 17.2 4.2 11.0 54.2 14.8 6.3 6.5 23.3 21.1 16.2 26.1 15.0 25.9 29.3 23.0 52.0 26.1 15.0 26.2 7.2 7.1 21.9 28.7 16.8 52.1 24.3 12.6 4.7 26.1 6.1 11.4 25.3 7.6 5.1 14.4 6.5 55.2 7.2 49.7 5.8 25.9 6.5 4.8 29.3 26.3 26.7 23.5 19.9 14.7 53.9 9.5 6.8 10.6 15.1 6.6 27.5 14.1 Tax Content 26.7 29.5 6.9 3.4 21.2 7.5 28.0 28.4 6.2 26.3 4.3 26.3 26.9 4.0 5.6 19.5 19.9 23.4 6.5 3.6 10.0 24.7 53.4 51.8 22.5 11.3 55.4 26.7 6.2 25.3 7.5 13.0 14.4 16.3 25.5 17.8 28.8 50.5 3.1 6.1 51.7 13.5 25.6 20.1 3.2 25.7 51.7 12.8 27.0 9.2 5.3 26.3 8.2 27.9 27.8 49.4 28.3 4.0 6.3 9.9 11.0 12.3 4.7 24.4 13.0 11.9 58.0 27.0 5.7 15.9 12.1 57.2 4.1 54.6 10.7 3.7 26.4 26.5 7.1 26.1 26.6 53.0 28.7 25.1 51.0 9.8 17.2 28.4 7.6 15.3 28.7 14.5 21.0 28.6 4.6 53.7 7.4 21.4 26.5 13.7 18.3 54.7 3.6 3.7 8.7 7.8 23.7 14.4 25.3 27.9 4.2 Gross Marketing Margin 4.6 16.4 5.2 14.1 55.6 12.7 5.4 32.2 54.5 11.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .5 9.4 6.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.8 23.5 21.7 24.0 53.6 20.1 11.5 6.5 7.7 25.1 11.3 28.4 26.9 19.5 53.2 15.3 26.4 11.5 2.9 49.1 14.2 26.9 17.7 53.9 29.6 21.3 53.9 26.0 25.

130 3.3 23.687.8 28.287 2.1 16.416 2.297 2.456 2.883.6 28.279 2.633 2.5 23.333.831.839 2.644 3.4 21.802 2.864 2.403 2.4 22.345.2 26.952.646 2.5 30.7 29.6 21.246 2.0 20.8 MJ ERVIN & ASSOCIATES 88 .000 3.771 3.744.429 2.081.869 2.673 2.412 2.587.592 2.9 29.326.298 2.473.141.180 2.011 2.510 3.703 2.245.843.179 3.9 26.853.720 3.897 2.966.370 2.677 3.182 3.325 2.3 Canada Avg RUL Rack Price (¢/l) 35.141 3.254.232 3.411.2 21.287.037 2.830.8 29.3 23.3 22.369 2.202.283.020 2.516.941 2.688.7 18.457 2.897 3.752 2.056 3.3 24.108.8 27.329 3.7 24.532.361.323 3.5 22.476.285 2.Table C: Canadian Supply.5 27.4 21.142.767.7 29.070 3.968 3.354.5 19.097 2.067.609.9 19.2 27.822.9 21.716.479 2.030.003.255 3.299 2.324 2.475 2.287 2.0 24.4 24.844.301 2.133 3.2 23.313 2.580 3.9 23.122.180 3.151.887.7 29.976.6 23.027 2.501.619 2.480.263.7 28.5 32.636.181.628 3.765 3.295.114 3.047 3.218 3.039.429 2.122 2.120.443 2.316.4 24.437.654.101.441.572 2.693 3.022.164.315 2.8 26.931 3.630.521 2.073 2.8 22.709 2.3 26.201.621.455.381 2.026 2.969 2.627 2.733 2.782 3.286.366 2.998.894.254 2.682 3.3 22.804 3.615 2.311 3.779 2.160 3.322 2.930 3.191 2.5 25.322 3.132.2 22.1 21.651 2.168 2.218.085.112 2.321.647.422.613 3.202 3.508.725.873.5 28.450 2.291.804 2.281.2 27.045 2.4 31.089.268 2.859 2.2 26.633.430.035 2.979 2.045 2.714.102.458.029 2.7 24.810.4 25.4 29.886 3.801.684 2.671.620 3.437.878 2.301.2 23.192.281 2.748.934.095 2.8 30.739.019.840.661 Canadian Domestic Gasoline Sales (M3) 2.469 4.979 3.8 21.642.331 2.270 3.070.735.439.220.176 2.256 2.600.462.7 31.960.874 3.379.833 2.002.6 26.8 23.242 2.935 3.796.884 2.0 28.180.853 3.6 24.1 23.799.612 3.254.338 3.130 3.801.193 3.176 3.415 2.485 2.075.299.199 2.346.823.808.900.377.973.9 17.322 2.798.509 3.876.373.4 32.625 2.7 34.044 2.269 2.5 27.101 2.813 2.710.853 2.389.865.262.140.1 29.667 2.565.729.775.2 29.193 3.636.9 22.9 30.932 2.1 22.2 27.206.301. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.152 2.045.904.661 Canada Avg ex tax RUL pump price (¢/l) 39.669.871 2.131.970.682. Inventory.827 3.970 3.938.9 23.209.9 23.748 2.773.300.8 33.294.958.251.890.933 3.7 21.1 23.967 2.897.672.732.995.113.409.2 24.837.8 23.499 2.2 27.544 3.335 2.235 3.9 31.785.558.599 2.622.626.095.5 31.083.564 2.378.141.502 2.880 Canadian Retail Gasoline Sales (M3) 2.250.477.566.461 3.889 3.051 3.743 2.589 3.893.518.025.161.666.818.427.1 23.781.767.369.637 3.2 20.709 2.047 2.930.970.498.9 26. Demand.490 3.188 3.015 3.641.841 2.7 26.558.604 2.

7 21.426.881.825.1 24.048.806.320 3.415 2.068.889.219 Canada Avg ex tax RUL pump price (¢/l) 27.149.155 2.519.970.5 21.965.184.130 3.928 3.074.785.994 3.214 2.5 21.607.8 24.940 2.467 2.505 2.112 3.469.205 2.906.773.077.936 3.0 24.714 2.344 3.644 3.930. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .840 2.376.5 25.250.082.0 25.2 25.294 3.338 2.123.261.675 2.2 25.480 2.679.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.601 3.986.324 2.791 3.414 3.566 3.4 26.593.363.483.830 3.999 3.617 2.198.0 26.871 3.797.649.660 3.703 3.977.6 20.692.863.0 25.382. demand.620.386 3.9 29.649.919 2.796.521 2.7 Canada Avg RUL Rack Price (¢/l) 20.539.799 2.753 3.961.264 2.9 22.671.648 3.4 25.1 21.667 Canadian Domestic Gasoline Sales (M3) 3.037 3.857.442 2.165.669 2.537.997 2.141 2.179.516 3.638 2.606.324.2 26.195.170 3.597 2.864 2.097.317 2.244 3.658.005 2.204.904.4 20.555.9 27.198 2.006 3.198.656 3.390.170 Canadian Retail Gasoline Sales (M3) 2.336.717.5 source: Statistics Canada (production.6 20.4 26.264 2.315.7 19.182.055 2.8 21.984 3.8 25.8 28.614.222 2.8 20.370.148.0 26.386 3.346 2.7 22.

6 48.3 61.9 64.8 49.5 56.7 50.5 46.8 64.6 56.9 53.1 41.9 62.0 62.9 49.4 46.0 50.1 50.2 62.0 54.7 White Rock Calgary 45.2 62.9 54.9 46.0 61.2 54.6 44.5 56.Table D: Pump Price History .9 52.9 61.9 56.3 52.9 53.0 52.9 52.8 53.8 47.6 55.5 60.6 48.4 55.8 52.9 51.3 50.4 48.2 62.4 53.0 62.1 49.7 53.9 53.9 61.6 53.9 56.5 58.8 59.9 53.9 MJ ERVIN & ASSOCIATES 90 .5 57.4 56.9 53.7 63.6 48.9 56.8 52.9 61.9 53.5 58.8 59.9 58.8 48.9 56.5 58.2 51.3 62.8 57.4 61.3 54.5 58.9 58.7 54.8 56.9 51.4 55.1 53.2 65.3 48.9 53.9 59.4 59.9 56.6 50.9 57.5 Vancouver 53.0 48.1 60.5 51.5 60.4 63.5 57.5 57.3 48.2 62.9 56.9 64.9 48.2 62.8 45.9 49.1 55.4 55.2 62.0 46.6 47.8 48.5 59.4 Winnipeg 49.9 62.2 46.5 47.8 56.4 52.0 57.3 49.9 47.7 46.4 65.9 52.9 45.8 53.9 44.0 44.5 57.9 56.2 65.9 51.4 47.9 64.0 59.0 59.5 55.9 54.8 48.2 51.5 53.9 47.8 47.8 50.5 59.8 56.5 51.6 62.7 57.0 61.7 45.4 55.5 45.4 52.4 58.5 58.8 56.3 50.3 52.6 58.6 46.5 50.8 51.2 46.0 61.7 62.9 55.6 49.7 65.6 50.4 58.5 59.7 48.2 62.6 54.5 58.5 60.3 49.3 55.0 39.0 61.2 54.9 52.4 54.2 54.4 61.9 54.9 54.4 57.5 58.9 63.6 58.9 57.3 59.7 51.5 59.8 54.9 56.2 50.8 52.8 53.1 55.5 58.2 47.7 51.9 61.7 65.4 61.8 44.9 58.6 54.9 54.8 Thompson 59.7 52.9 54.8 53.2 56.9 56.2 61.5 59.9 54.7 49.5 57.9 53.5 51.5 61.5 59.5 60.0 58.5 51.4 55.2 62.3 51.7 65.2 62.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.4 56.2 50.9 55.5 58.9 50.1 49.4 56.4 56.1 44.9 58.1 50.4 55.8 56.9 47.3 54.1 49.2 50.5 60.5 58.1 52.5 45.5 57.1 43.5 55.1 52.5 52.4 49.8 57.8 56.2 51.9 56.1 53.5 57.2 55.0 61.9 55.2 59.9 49.0 55.8 55.1 56.4 53.5 54.9 47.6 47.9 55.5 59.5 53.4 54.8 50.5 57.2 57.7 50.7 62.5 59.5 54.2 Nanton Peace River Regina 49.9 56.7 65.5 62.7 65.9 64.9 44.7 54.2 58.3 55.5 57.3 42.4 46.4 57.7 45.9 52.8 52.6 55.6 59.0 62.4 52.9 59.2 63.5 57.9 54.9 53.3 52.3 56.0 61.4 52.9 58.5 53.5 47.1 55.5 57.8 41.5 47.5 51.5 59.6 53.4 54.5 56.5 56.9 52.5 58.7 51.5 52.9 51.9 53.1 59.4 53.1 44.5 49.7 53.6 51.7 44.0 52.2 43.5 58.6 52.8 52.9 61.5 56.5 57.4 46.4 52.7 53.6 47.5 61.6 46.2 48.9 52.3 52.7 48.7 52.4 56.7 57.0 Sioux Lookout 62.5 60.5 57.7 54.9 53.0 61.8 48.4 50.3 52.2 46.9 64.9 61.4 56.

4 53.2 56.2 60.6 53.6 52.7 58.8 55.5 59.4 50.7 57.1 51.6 50.6 55.3 55.2 61.2 53.2 50.1 57.0 51.4 58.1 56.0 48.9 55.2 49.5 63.5 MJ ERVIN & ASSOCIATES 91 .3 54.7 52.4 53.9 57.1 58.7 56.3 51.6 58.5 57.1 60.8 54.0 55.1 58.5 54.3 52.8 51.4 57.9 49.7 56.2 57.0 57.0 55.1 61.3 59.9 61.1 53.0 50.4 53.8 60.9 62.3 55.0 54.7 54.0 53.0 54.5 52.3 55.8 61.1 52.1 53.2 51.8 55.7 49.5 56.6 58.2 56.6 63.9 53.9 56.2 53.2 49.4 58.1 51.2 57.6 56.1 55.9 58.3 54.4 58.0 54.0 47.1 53.7 64.6 54.2 55.7 57.5 53.9 55.5 57.3 56.9 60.8 54.7 53.2 58.6 57.1 53.9 60.6 63.7 52.7 59.9 57.8 52.9 61.5 52.8 49.6 54.2 56.3 53.4 58.2 59.9 63.4 51.9 64.4 53.1 55.2 55.7 57.9 55.3 54.3 54.6 53.2 Montreal 63.0 52.4 54.9 55.4 58.6 58.2 55.1 48.7 51.7 46.6 54.9 50.1 51.7 52.3 52.7 59.2 57.8 55.6 54.1 57.2 55.9 61.7 51.6 51.0 57.0 53.4 54.0 50.3 59.3 54.0 58.9 57.2 57.5 59.9 53.3 54.9 61.1 56.2 54.2 57.7 48.6 60.6 52.7 56.2 54.1 54.9 53.5 53.8 50.8 47.2 57.6 55.3 55.4 57.3 60.4 54.1 54.6 55.5 59.4 54.8 56.2 55.8 63.5 51.5 54.2 60.0 61.7 55.7 60.0 59.0 54.4 52.5 61.0 52.2 51.1 55.4 57.8 55.0 52.0 56.6 54.1 59.4 52.2 53.2 52.6 59.1 52.6 52.3 52.1 61.9 49.5 58.4 54.2 57.2 57.6 56.1 61.3 53.3 49.6 54.0 47.5 63.4 57.0 52.1 Toronto 52.6 51.5 51.9 53.6 52.8 49.9 53.0 55.6 50.0 56.1 54.3 57.1 55.3 56.4 51.2 54.5 57.6 55.1 55.8 52.9 52.4 54.9 49.1 49.9 54.5 56.5 64.9 55.1 58.2 57.3 55.3 53.0 50.7 57.6 49.2 49.5 60.2 52.9 54.5 51.7 44.6 59.8 54.3 53.0 53.3 56.5 55.5 55.2 56.8 55.2 56.9 64.0 51.8 61.2 57.5 56.2 51.5 54.6 52.5 67.7 54.6 49.8 55.6 55.6 63.6 51.9 55.5 51.0 60.2 56.2 61.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.Table D: Pump Price History .8 53.1 60.8 50.0 59.3 58.5 52.5 54.4 55.7 56.0 60.5 54.0 57.6 58.4 54.8 50.0 59.5 61.4 58.8 Halifax Charlottetown 60.1 59.9 60.7 54.1 54.9 55.5 54.3 49.4 45.0 56.7 48.3 59.7 51.0 60.8 60.7 54.5 48.7 54.0 55.8 54.1 52.0 57.6 53.2 54.6 54.2 58.7 50.3 56.1 53.2 52.4 57.5 57.9 49.2 58.4 54.6 50.5 Ottawa 58.5 52.2 Chicoutimi Gaspé Saint John 60.5 60.8 59.7 56.6 56.7 56.1 55.9 64.4 51.6 59.6 52.8 55.7 54.1 54.8 56.2 49.7 57.4 57.3 54.9 58.8 57.5 61.3 62.6 61.6 55.1 56.6 56.6 61.5 64.5 56.0 52.8 57.5 53.9 57.9 55.5 53.3 54.8 57.5 57.7 58.2 54.2 56.9 56.0 55.8 53.2 55.9 54.6 55.5 56.3 53.6 53.2 61.9 56.4 55.0 52.1 57.3 61.5 54.6 Canada Avg 55.9 55.1 58.2 56.6 58.8 55.5 63.3 56.0 61.3 54.4 49.7 53.3 55.7 51.9 55.9 56.0 55.6 52.2 59.3 52.0 60.7 47.3 59.8 53.4 60.0 48.5 55.1 54.9 51.9 61.0 49.

0 Apr-92 30.5 23.8 26.7 25.5 Jul-95 30.3 33.7 26.1 26.9 21.3 28.4 24.9 Aug-93 30.4 30.9 29.3 27.2 29.3 29.0 25.4 29.3 23.1 20.2 24.2 22.8 24.4 31.6 26.3 Jan-93 30.2 24.9 28.7 Sep-94 32.3 30.9 24.3 28.7 30.3 29.9 30.9 26.4 24.9 21.1 Feb-93 29.9 27.4 21.4 29.9 25.7 28.8 28.2 25.8 28.6 23.5 27.8 Jan-94 25.9 26.2 27.6 28.4 29.0 22.1 27.4 30.5 24.9 28.3 30.5 Aug-94 28.5 21.0 32.1 26.4 Mar-92 28.3 28.2 Apr-93 28.2 32.6 Sep-93 28.2 Jun-94 31.4 20.8 27.9 25.1 28.5 21.5 27.0 23.3 28.2 26.0 23.1 28.6 24.6 27.0 31.7 29.0 24.8 25.4 25.3 28.5 29.4 29.5 24.0 24.4 31.4 27.7 27.7 Jan-92 31.9 24.4 22.6 22.7 Mar-94 28.7 28.3 29.6 22.7 Jan-95 27.2 24.3 23.6 26.3 31.3 29.5 23.8 24.6 23.3 29.3 29.4 22.6 27.4 27.4 23.2 29.1 30.5 24.8 27.9 30.7 29.4 27.4 31.6 25.2 26.2 28.9 29.7 26.3 26.5 27.0 26.6 29.3 26.8 Feb-94 24.2 24.5 28.5 29.1 22.2 28.4 28.3 24.3 29.6 29.6 May-95 29.9 25.1 25.4 22.7 28.7 Aug-92 24.9 28.6 26.3 32.1 25.4 29.5 26.6 27.7 26.8 27.0 27.8 24.2 26.6 26.9 23.1 22.3 May-94 28.3 29.6 Aug-95 30.1 27.8 27.4 28.6 23.1 25.0 29.5 29.6 21.8 26.9 Jul-93 28.4 23.7 28.9 23.2 27.5 29.6 Mar-93 28.3 Jul-92 31.4 25.4 23.1 25.6 30.1 30.3 24.8 31.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.9 20.2 28.8 28.5 27.7 Winnipeg extax 27.1 Apr-94 29.3 Feb-95 26.9 24.0 31.6 26.6 29.8 29.8 29.0 21.3 26.7 29.5 Oct-92 30.0 24.6 30.4 31.9 31.9 27.4 Jun-95 30.6 28.2 26.7 30.5 26.1 31.8 25.9 24.0 23.1 24.9 27.0 26.0 May-92 28.1 19.4 31.7 24.9 Oct-94 32.8 24.0 25.4 Dec-92 31.7 24.0 23.Table E: Ex-tax Pump Price History .0 23.2 25.0 Oct-93 28.7 27.9 29.0 Jun-93 26.9 27.5 Feb-92 28.7 26.8 25.4 30.9 28.8 Dec-93 26.7 31.2 Nov-93 27.9 26.4 27.6 30.1 31.6 Jun-92 32.8 29.7 30.2 23.8 26.3 29.4 28.3 30.6 26.6 29.6 26.3 27.7 Sep-95 30.7 30.4 31.5 Oct-95 30.5 25.2 28.4 29.4 26.0 May-93 29.5 Jul-94 29.3 26.3 21.3 Dec-95 Edmonton Regina extax extax 27.6 26.4 30.2 Dec-94 26.8 29.4 29.8 27.3 26.5 27.0 25.6 23.9 26.8 23.6 25.4 20.1 23.4 27.2 Nov-92 31.5 Sep-92 29.6 27.1 Mar-95 29.1 24.6 24.1 Apr-95 30.5 29.1 24.2 Nov-94 29.8 27.7 28.9 30.0 28.9 25.4 25.4 31.0 26.4 25.9 25.8 21.4 MJ ERVIN & ASSOCIATES 92 .7 29.5 Nov-95 30.7 30.7 28.4 20.8 Toronto extax 26.3 24.9 24.8 26.4 25.3 30.8 22.0 27.3 29.

4 31.2 34.1 34.6 34.6 33.9 30.1 34.2 33.9 29.6 36.8 30.7 29.5 33.4 33.4 26.2 29.1 28.1 24.7 22.1 29.7 28.9 27.0 29.5 25.8 28.9 32.3 29.4 25.7 28.7 34.0 32.1 32.6 32.4 28.7 27.5 25.0 26.6 28.4 31.6 36.1 30.2 25.7 23.6 32.1 30.6 28.0 28.6 32.7 Quebec extax 32.7 24.4 25.0 29.2 26.9 37.4 32.7 26.6 22.8 29.3 28.8 30.5 30.8 27.7 32.5 25.3 29.3 25.2 32.8 28.3 27.4 24.7 32.0 33.1 31.8 23.7 30.0 26.5 25.3 35.7 26.7 27.8 27.1 Montreal extax 31.0 23.3 27.4 27.3 25.8 23.5 28.0 25.4 24.6 27.0 33.7 30.8 29.0 23.8 29.8 25.7 25.2 27.6 26.6 27.7 26.4 28.1 26.7 33.4 26.6 33.7 23.8 32.5 25.8 27.9 27.9 30.5 24.0 36.8 30.6 23.2 24.1 22.8 28.9 28.4 36.9 23.3 29.8 28.2 23.3 26.8 23.2 27.3 28.0 25.7 32.5 29.5 26.2 24.6 32.3 33.4 32.7 24.8 32.8 32.0 34.0 30.2 25.9 32.2 26.5 36.8 29.0 30.0 33.9 29.2 Saint John Halifax extax extax 34.3 34.6 27.7 28.9 33.8 Canada Avg extax 29.9 26.8 26.4 26.5 27.2 30.1 29.8 33.2 21.9 28.1 32.2 27.8 23.7 23.7 24.2 26.9 29.5 25.0 25.2 22.1 29.3 28.6 31.8 26.1 34.2 22.5 24.2 27.8 27.6 28.7 24.9 30.9 29.7 34.4 33.1 28.5 27.2 22.5 26.3 29.8 26.1 24.9 27.7 29.6 26.9 32.5 32.3 31.6 29.0 31.9 29.3 25.8 24.4 36.7 MJ ERVIN & ASSOCIATES 93 .0 36.9 26.0 29.2 27.7 28.2 32.1 32.6 26.9 26.9 30.5 33.3 31.4 33.0 26.3 22.3 28.7 26.4 32.0 32.6 34.1 24.2 28.8 33.9 30.5 28.1 30.8 25.9 31.6 25.3 25.5 27.3 24.2 33.2 28.6 23.7 28.4 25.8 26.6 29.2 27.8 29.6 32.0 27.3 26.3 28.1 32.2 25.5 31.3 34.8 25.3 23.3 30.2 30.Table E: Ex-tax Pump Price History .2 32.8 32.1 26.3 31.5 34.3 34.2 27.6 25.8 26.6 24.1 25.0 28.3 29.9 33.6 26.0 28.7 24.8 28.1 24.2 28.4 31.9 31.4 33.5 33.5 27.2 36.7 27.5 30.1 23.9 29.6 Charlottetown extax 36.8 36.2 25.9 32.0 28.6 31.5 28.6 28.2 27.3 31.3 26.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.9 35.5 30.9 27.7 26.2 27.9 24.7 26.0 34.5 28.6 28.4 22.4 34.5 31.8 28.2 26.4 33.2 26.2 36.3 31.0 34.7 27.0 33.2 22.9 27.2 30.0 33.9 29.4 25.4 21.8 25.0 28.

6 18.1 19.5 22.2 19.1 23.5 22.3 21.2 20.3 23.0 22.4 23.4 21.6 19.8 23.6 23.2 22.7 21.0 19.6 19.5 21.9 22.7 19.1 20.4 17.3 23.7 22.5 20.6 20.8 20.4 20.2 19.5 21.7 20.4 22.7 22.3 26.8 27.9 22.6 23.4 22.2 21.8 22.2 29.6 19.6 25.4 21.4 22.9 18.6 21.4 23.2 17.9 21.0 23.5 20.1 20.1 23.2 20.8 19.3 17.9 17.2 20.9 18.8 23.2 Quebec city Montreal rack Toronto rack rack 19.8 23.6 20.0 23.7 21.1 15.1 20.2 21.9 24.4 22.6 25.0 21.4 21.1 22.5 21.4 21.3 18.3 18.4 20.2 21.5 23.4 18.9 22.8 18.8 22.7 22.9 18.2 21.5 23.8 23.1 21.6 20.8 22.2 22.3 19.7 21.6 23.7 21.3 18.2 23.4 21.4 21.6 20.3 20.8 21.4 22.4 24.8 22.9 20.2 21.0 22.2 18.8 18.7 23.6 20.7 21.7 17.8 23.2 18.4 22.3 19.8 23.6 23.8 21.8 22.3 23.8 21.5 19.0 21.0 19.7 20.7 22.2 16.4 20.4 22.0 23.6 23.7 20.8 20.7 22.3 21.1 21.0 23.9 21.0 20.4 21.1 22.8 Ottawa rack Thunder Bay rack 20.1 18.9 21.4 21.3 24.8 20.3 21.1 16.4 15.2 22.9 21.8 18.5 24.5 22.4 22.9 23.6 20.3 20.8 21.5 18.9 21.3 19.7 22.5 27.3 23.5 17.4 19.7 21.9 25.5 21.2 20.5 24.2 20.0 23.3 19.9 23.8 18.4 20.2 19.1 21.9 22.9 20.7 22.1 20.6 21.8 21.9 19.6 23.7 22.5 19.0 22.5 17.2 16.9 22.3 17.5 22.1 19.2 18.6 19.3 23.4 21.0 23.5 21.8 24.2 23.5 21.4 22.6 25.Table F: Rack Prices .7 22.1 20.7 19.0 22.4 23.5 26.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.9 20.3 20.9 21.4 21.0 21.7 16.4 22.6 19.3 22.5 17.7 17.2 21.7 MJ ERVIN & ASSOCIATES 94 .1 21.4 23.7 23.1 22.8 20.3 23.4 22.5 20.2 23.4 21.5 21.4 21.1 20.8 19.1 Halifax rack 20.1 21.8 19.1 21.0 23.6 19.1 22.6 22.9 22.8 25.3 24.3 17.5 22.8 20.8 20.0 22.8 21.3 22.3 21.1 19.0 23.5 24.4 20.4 21.0 19.2 20.2 16.2 18.7 18.3 22.0 21.0 21.5 22.1 20.8 23.7 17.6 20.3 23.2 23.9 18.8 19.9 22.1 21.5 20.1 23.2 18.2 21.5 23.1 22.2 21.5 21.1 20.7 18.0 22.0 21.3 20.3 22.3 21.5 18.0 20.1 21.7 21.1 22.0 24.1 15.0 21.1 22.1 24.

7 25.2 21.7 23.6 17.4 20.6 25.8 22.1 21.4 21.3 18.3 24.0 18.2 24.2 21.5 21.1 20.9 21.5 23.6 20.4 22.9 19.9 19.1 21.9 21.3 17.0 20.2 23.0 22.9 19.7 22.9 21.7 21.8 23.2 23.3 24.1 23.9 24.9 18.9 24.4 24.1 24.9 23.0 25.0 18.7 22.1 18.1 25.0 22.4 22.7 23.3 23.6 23.7 22.4 22.4 21.9 21.5 19.0 22.8 22.8 23.9 22.3 17.7 19.6 23.9 22.3 20.7 24.1 23.5 19.8 20.5 20.6 21.5 23.6 23.6 22.5 24.5 23.5 23.8 Vancouver Victoria rack rack 24.5 20.9 21.2 22.0 23.4 21.6 21.9 23.7 21.9 22.6 23.5 23.3 21.0 20.6 20.3 23.3 24.0 21.2 22.9 22.2 19.9 19.1 23.2 24.9 21.4 23.8 20.9 19.1 21.1 16.2 22.1 18.1 23.4 23.8 20.9 21.1 17.1 23.4 24.4 24.6 21.5 24.7 22.9 22.5 MJ ERVIN & ASSOCIATES 95 .3 24.6 25.8 24.7 17.1 23.0 17.0 21.8 23.5 22.9 19.5 22.2 23.4 22.5 21.9 23.4 21.7 21.5 21.4 22.0 22.8 24.7 21.7 23.8 20.7 22.9 20.7 25.3 20.7 22.9 19.8 22.1 21.5 18.9 23.4 23.7 21.8 19.0 20.0 23.1 20.5 21.5 17.6 23.6 21.2 18.8 22.7 21.1 25.0 20.5 21.0 22.3 23.4 21.0 24.0 23.2 21.6 21.6 23.3 17.3 22.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.9 20.4 21.3 19.2 22.1 23.1 16.5 22.3 21.3 22.1 21.8 20.0 23.7 24.9 20.9 22.2 21.7 21.6 24.5 21.4 24.6 19.6 24.0 21.7 23.3 22.0 23.5 20.2 22.1 19.9 24.2 22.0 24.1 21.0 17.4 23.3 21.5 21.1 22.9 22.1 21.5 20.1 22.1 23.9 18.3 22.3 19.2 20.5 21.0 22.6 23.2 19.2 23.Table F: Rack Prices .8 24.2 23.0 22.5 24.1 22.5 24.7 21.7 21.7 23.2 21.2 20.0 21.9 22.1 21.5 23.0 24.6 22.8 25.8 22.6 22.8 21.2 20.9 17.3 23.1 19.0 22.3 23.9 22.2 24.5 18.4 20.2 Edmonton Rack 23.2 24.6 22.6 20.6 21.6 23.6 25.8 21.7 24.2 22.2 20.5 19.6 21.4 19.5 21.7 22.6 21.7 21.9 23.8 21.6 21.7 20.4 21.2 24.3 21.8 18.5 22.1 22.3 23.0 24.8 21.7 22.7 22.6 21.9 21.4 21.5 19.3 23.0 21.4 19.1 23.6 20.1 22.8 22.2 20.4 18.2 23.6 19.7 21.1 25.5 Canada avg rack 22.7 17.3 20.7 21.6 17.1 22.1 20.8 23.2 22.5 23.5 22.7 22.5 22.9 21.5 21.1 23.3 20.9 23.7 18.4 25.

45 53.837 329.00 62.07 61.377 30.241 451.246 2. MJ ERVIN & ASSOCIATES 96 .48 56.249.018.400 142.113 2.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.40 59.101 256.245 351.26 49.32 51.597 2.000 1.10 53.101 447.194.83 68.60 49.73 65.145.53 61.905 183.858.980 120.000 63.30 63.72 58.153 316.093.19 52.Table G: Study Market Data .02 51.00 57.745.30 68.40 58.88 64.052 84.636.22 59.056.119 632.770 2.543 2.250 748.018 2.296 179.483 2.19 49.000 1.50 56.214 248.45 63.87 61.74 57.24 61.621 102.894 1.420.26 44. Urban.702 333.40 54.508 2.174.30 57.832 91.850 126.90 63.30 66.475 1.20 59.790 185.811 120.448.014 3.50 55.058 2.985 636.20 61.192 2.796 2.890 2.20 58.949 1.412 722.93 63.30 52.10 63.859 240.749 91.17 Diesel 64.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.557.268 478.483 63.42 53.234 799.298 576.23 53.895 600.972 429.500 378.166 102.30 54.903 33.211 15.13 58.23 63.009 54.72 74.102 98.98 59.625 64.25 57.334.678.85 48.196 669.03 58.10 59.78 67.00 66.628 702.94 55.897 350.88 54.000 217.702.935 758. and All Study Markets are weighted (by market population) averages.85 54.70 49.34 63.141.90 67.945.00 67.120 570.00 48.712 1.92 51.922 103.38 56.834 71.971 473.72 63.749 243.414 450.332 101.698 Note: Regional.20 54.030.40 61.370 41.28 65.60 70.830 2.20 60.66 50.70 55.997 397.204.26 63.50 56.516.554 2.30 54.89 60.89 61.18 51.60 60.796 529.438 591.687 1.614 3.220 389.671 399.686 273.35 73.238 2.89 65.36 54.704.11 58.60 50.00 57.16 59.669 203.643 184.53 48.460 833.90 62.060.173 568.86 56.10 52.80 64.529 123.65 54.97 51.55 58.983 1.513 19.150 48.549 111.620.933 25.300 578.97 63.810.40 63.

01 22.89 29.89 28.56 22.45 23.51 20.41 27.50 20.28 22.63 20.36 26.23 23.28 23.83 25.59 22.59 28.45 20.32 33.07 24.83 22.04 24.88 28.50 25.93 27.18 25.84 28.42 25.03 24.07 26.51 25.09 27.55 28.49 25.64 28.45 20.33 21. and All Study Markets are weighted (by market population) averages.84 28.16 21.45 24.34 26.95 Premium 26.39 22.88 22.16 22.88 28.92 21.51 25.33 21.40 25.38 24.95 25.21 27.45 29.33 21.15 29.39 21.65 27.35 25.38 24.49 31.45 24.30 29.33 21.11 26.85 28.08 23.45 20.07 26.45 22.43 21.98 25.82 28.92 30.48 25.03 21.59 22.94 23.25 27.27 29.43 28.40 27.04 26.93 23.69 23.88 20.23 24.25 24.37 27.33 22.Rack Price.54 28.39 Note: Regional.21 27.99 28.59 24.15 24.90 26.36 24.96 22.53 23.33 21.95 22.43 20.49 21.55 28.81 25.49 21.83 23.08 25.09 24.78 Product taxes Midgrade Regular 26.83 24.23 25.07 24.47 20.83 24.34 20.96 24.97 22.63 21.27 20.90 27.Table H: Study Market Data .89 25.98 28.07 24.95 22.83 24.31 22. Tax (by Grade) Rack Pt.74 21.59 28.63 26.39 22.88 20.97 25.13 23.26 28.97 23.45 28.33 22.88 22.96 24.42 24.42 24.75 27.45 25.15 20.20 20.23 26.57 29.58 25.26 27.47 28.92 20.43 21.42 27.73 32.25 28.33 27.34 25.03 20.15 27.65 26.91 21.16 29.75 22.57 22.45 20.63 28.43 20.82 21. Urban.65 21.47 27. MJ ERVIN & ASSOCIATES 97 .02 23.93 23.87 26.32 21.73 26.45 29.69 27.81 21.59 28.25 31.99 26.63 24.17 20.81 28.89 26.76 24.01 28.92 22.63 25.81 27.20 27. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.41 22.39 21.68 Diesel 36.18 28.51 31.06 28.76 25.33 22.

22 14.47 0.50 58.24 7.13 11.79 0.24 7.08 3.17 9.31 34.52 5.33 9.(∑x)2 ]/n2.96 27.92 22.54 50.85 26.81 28.07 0.00 4.60 23.18 55.91 0.73 10.68 2.80 9.08 17.30 12.00 58.21 24.28 27.56 4.15 66.16 20.58 66.95 21.01 31.18 21.89 0.27 60.28 1.60 7.06 28.71 33.90 59.43 23.77 30.93 22.49 2.35 27.07 30.38 22.85 24.34 0.29 8.91 2.96 25.97 0.91 22.22 1.033 0.86 49.21 8.90 23.51 11.83 12.53 22.20 14.05 6.29 24.81 26.03 28.84 5.00 22.75 28.14 60.64 2.96 28.83 36.60 14.89 21.66 28. MJ ERVIN & ASSOCIATES 98 .23 7.27 6.28 56.22 5.78 2.83 21.31 23. and All Study Markets are weighted (by market population) averages.64 3.36 0.73 1.34 1.48 7.99 0.44 33.37 26.50 3.41 12. Urban.64 3.82 3.02 13.24 23.73 22.17 11.77 5.83 1.73 2.38 7.72 26.63 60.32 31.75 23.35 28.33 .10 3.04 22.44 56.84 28.04 28.94 Note: Regional.86 28.99 2.98 0.04 23.85 21.13 0.83 27.43 0.28 1.31 28.30 5.36 20. Costs.16 54.27 11.10 6.64 1.25 1.50 10.11 31.62 56.27 62.79 33.19 5.50 0.41 7.98 31.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.08 0.00 0.94 17.98 0.26 27.02 3.12 23.21 8.68 7.91 29.38 2.12 6.35 58.95 6.01 0.23 38.02 0. Average Deviation is the average deviation of the market values from their mean (average) value.63 58.70 22.11 26.31 0.26 3.49 57.57 12.53 21.42 2.88 5.94 22.35 60.68 7.03 7.82 32.08 55.06 0.06 5. Variance uses the formula [n∑x2 .52 30.88 31.80 1.41 29.58 1.93 56.04 0.53 6.77 37.44 25.14 7.98 1.39 56. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.59 4.20 5.82 95 Retail Gross Product Margin 6.56 24.38 28.26 5.89 28.76 5.16 3.17 1.96 3.45 6.47 58.18 7.02 22.13 28.Table J: Study Market Data .Blended Prices.07 0.29 7.17 26.38 0.85 11.45 1.

Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.966 3. MJ ERVIN & ASSOCIATES 99 .550 694.Table K: Study Market Data .250.066 3.800 $ 225.780 $ 85.223.805.871) $ (128.208) $ (226.367) $ (164.995 $ 234.263 $ 60.913 $ 139.120 $ 54.550 $ 177.081 $ 222.014.011.000 2.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.716 Note: Regional.004.302 $ 69.209 $ 26.098 $ (320.375) $ (49.632 $ 256.000) $ (241.719 3.467 $ 96.010 1.098.688 $ 85.095.827.622 $ 174. these averages are based on all applicable study markets.640 4.746 $ (374.279 $ 154.247 4.855 $ 278. For 95 net retail petroleum revenue.224 $ 189.694 3.510 $ 60.779 $ 121.750 $ 271.544 $ 175.852) $ 119.900 $ 179.638 2.272 $ 210.564 $ 252.332) $ (238.135 $ 199.481 $ 96.648 3. and consolidated outlet income these averages are based only on those markets with available data.394.272 $ 118.244 95 net retail Ancillary Revenue petroleum revenue $ 208.875 $ 255.993 $ 113.900 2.089.068 3.794 3.023 $ (15.144 2.856 3. Outlet Costs.000 $ 156.013 $ 227.429 $ 238.032 $ 77.289 981.542 $ 222.502 $ (80) $ 60.956) $ 200.209 $ 82.295 $ 174.102 $ 223. Revenue. but for ancillary revenue.911) $ (166.067 $ 92.071.Sales.197.143) $ (249.604.117 $ 207.478 4.707 $ 260.934 3.630 3.772.866) $ (244.623 2.465.074 $ 131.890.557) $ 102.646) $ (98.885. and All Study Markets are weighted (by market population) averages. outlet costs.246 $ 118.241) $ (227.157.217 2.265.058.626 $ 81.542.766) $ (274.948 3.526 $ 207.129 $ 97. Urban.677 $ 180.572) $ (286.520 5.837 $ 56.658.

50 3 10.745 16.550 1.89 7.97 8.17 19 9.48 7 7.40 1 3.33 0.715 14.28 17.23 8 31.80 10 4.004 3.06 5.21 0. rank* 3.870 120.604 3.43 12.88 11 8.775 678.08 4 2.60 3.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.775.Demographic Profiles Population pop’n 299 . of Outlets No.29 8 7.790 1.55 19 11.23 6 7.84 12 5.475 3.975 2.157 2.675 179.20 0.76 18 5.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.465 694 3.827 3.41 1.400 74.36 5.585 6.60 11 7.845 15.071 2.223 3.098 4.00 11.85 15 11.47 7.658 3.98 6.095 3. of Brands No.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.27 1.06 16 4.20 17 14. MJ ERVIN & ASSOCIATES 100 .98 7.96 5.53 10 6.014 5.29 1.13 2 11. N refers to study sample size (total = 481).315 710.51 9 11.73 14.73 5 10.24 0.Table L: Study Market Data .68 4 7.95 3 9.06 1 5.38 0.41 0.000 pop’n No.45 14.47 14 3.10 3.970 330.52 13 5.54 6 2.01 7 2.42 5 14.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.91 17 4.90 13 4.79 6.542.310 1.45 0.08 16 3.27 0.91 12.30 0.02 0.605 16.04 15 4.88 12 7. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.058 1.089 3. inverse ranking is used (lowest value = 1).250 981 2.22 3.145 81.89 2 4.30 1.22 0.08 3.40 9 4.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.394 2.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.265 2.50 8.275.180 616.50 9.

Ottawa ON. aviation and lubricants marketing channels. Petroleum Products Address: 235 Queen Street.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Principal Address: #400. Ervin. safety and business issues. 119 . Vice President Public Affairs Address: 275 Slater Street. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). and provide background resources to industry public affairs managers and the media. Contact: Maureen Monaghan Address: 580 Booth Street. Ottawa ON. They maintain a large database of historical prices at most major centres. and in doing so. health.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. accessible through a public fax-back dial-in system. Contact: Michael J. generate jobs and growth.14th Street NW Calgary AB. bulk. They work with major oil companies in benchmarking performance in the retail. The SCF is the basis for this study. a series of studies whose goal is to strengthen Canada’s competitiveness. Ottawa ON. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Contact: Cindy Christopher. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . cardlock. Contact: Brendan Hawley. Senior Advisor.

Its monthly publication “Refined Petroleum Products” (cat. Ottawa ON. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Contact: Len Bradley. no 45-004) is a useful source of supply and demand volume data.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Contact: Robert Curran. Energy Section Address: Statistics Canada. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. 311 . SW Calgary.ab. Contact: Gerard O’Connor. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Calgary AB.Octane Magazine Octane is Canada’s refining and marketing trade journal.6th Ave.6th Avenue. Octane is published quarterly. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Executive Director Address: 214. and is a useful “window” on this industry.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. 101 . Managing Editor Address: Suite 2450. Supervisor.

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